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Production, Investment and Wealth Dynamics under Financial Frictions: An Empirical Investigation of the Selffinancing Channel

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  • Alvaro Aguirre
  • Matias Tapia
  • Lucciano Villacorta

Abstract

The ability of firms to accumulate wealth and build collateral is key to overcome financial frictions. The strength of this self-financing channel depends on the productivity process faced by firms and the parameters associated with the production function, and may be quantified by the elasticity of wealth accumulation to productivity shocks. We propose a framework to jointly estimate the production function, the productivity process, and the wealth accumulation process that is robust to financial frictions. We show that standard methods (e.g. Olley-Pakes) fail under financial frictions: they overestimate the labor elasticity and underestimate the capital elasticity of the production function, and underestimate the persistence and dispersion of the productivity process. We apply our method to the universe of Chilean firms and confirm these predictions, with factor elasticities varying around 25%, and productivity volatility more than doubling. We find evidence that is in line with the self-financing channel: (i) the reaction of investment to productivity shocks is contingent on the stock of collateral, with larger responses from unconstrained firms; (ii) highly productive firms accumulate wealth after positive and persistent productivity shocks, with a larger effect in wealthpoor firms.

Suggested Citation

  • Alvaro Aguirre & Matias Tapia & Lucciano Villacorta, 2021. "Production, Investment and Wealth Dynamics under Financial Frictions: An Empirical Investigation of the Selffinancing Channel," Working Papers Central Bank of Chile 904, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:904
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    References listed on IDEAS

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    2. Julian di Giovanni & Manuel García-Santana & Priit Jeenas & Enrique Moral-Benito & Josep Pijoan-Mas, 2022. "Buy Big or Buy Small? Procurement Policies, Firms' Financing, and the Macroeconomy," Staff Reports 1006, Federal Reserve Bank of New York.
    3. David Kohn & Fernando Leibovici & Michal Szkup, 2021. "Financial Frictions and International Trade," Documentos de Trabajo 563, Instituto de Economia. Pontificia Universidad Católica de Chile..

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