Sticking to the winners - Heterogeneous financial frictions and growth

Abstract

I analyze government intervention in a heterogeneous aents moderl of financial frictions. While homogeneous borrowing constrainst (conditional on wealth) previal in the laissez-fire equilibrium, government attention to a few arbitratily chosen firms can generate endogenously heterogeneous credit constraints. I show that persistent heterogeneity in borrowing constraints increases growth and total factor productivity in the long-rung as a result of capital transition towards firms with better credit contions. In general, more persistent credit limits lead to higher economic growth. However, the transition period to such a higher growth regime can be governed by an economic slowdown. This model helps explain the economic growth South Korea experienced in recent decades and its relationship to the “chaebol” -conglomerates that received beneficial treatment by the government and preferential credit contidions.