(Non-Monotonic) Effects of Productivity and Credit Constraints on Equilibrium Aggregate Production in General Equilibrium Models with Heterogeneous Producers

TL;DR

This paper demonstrates that in a market economy, aggregate production is influenced by individual heterogeneity and financial frictions, leading to non-monotonic effects of productivity and credit constraints on overall output.

Contribution

It establishes conditions under which productivity and credit limit improvements can have non-linear, non-monotonic impacts on equilibrium aggregate production in heterogeneous producer models.

Findings

Aggregate production depends on individual characteristics and financial frictions.

Non-monotonic relationship between productivity, credit constraints, and output.

Improving productivity or credit limits may not always enhance economic development.

Abstract

We show that, in a market economy, the aggregate production level depends not only on the aggregate variables but also on the distribution of individual characteristics (e.g., productivity, credit limit, ...). We prove that, due to financial frictions, the equilibrium aggregate production may be non-monotonic in both individual productivity and credit limit. We provide conditions (based on exogenous parameters) under which this phenomenon happens. By consequence, improving productivity or relaxing credit limit of firms may not necessarily be beneficial to economic development.