
Pavel Ševčík
Département des sciences économiques, ESG UQAM
Rui Castro
Department of Economics, CIREQ, McGill University
Abstract
We study the aggregate productivity effects of firm-level financial frictions. Credit constraintsaffect not only production decisions but also household-level schooling decisions. In turn, entrepreneurialschooling decisions impact firm-level productivities, whose cross-sectional distribution becomes endoge-nous. In anticipation of future constraints, entrepreneurs underinvest in schooling early in life. Frictionslower aggregate productivity because talent is misallocated across occupations and capital is misallocatedacross firms. Firm-level productivities are also lower due to schooling distortions. These effects com-bined account for between 36% and 68% of the US–India aggregate productivity difference. Schoolingdistortions are the major source of aggregate productivity differences.
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