Abstract

We study a model of establishment dynamics in which entrepreneurs face a financing constraint. We ask: does the model, when parameterized to match salient features of plant-level data, predict large aggregate TFP losses from misallocation? Our answer is: No. We estimate financing frictions that are fairly large: in our economy half of the establishments face binding borrowing constraints and an implicit external finance premium of 55 % on average. Efficient establishments are, nonetheless, able to quickly accumulate internal funds and grow out of their borrowing constraint. Parameterizations of the model under which this process of internal accumulation is hindered can, in principle, cause very large TFP losses. Such parameterizations are, however, at odds with important features of plant-level data: the variability and persistence of plant-level output, as well as differences in the return to capital and output growth rates across young and old plants.