Mauro Napoletano (University of Côte d’Azur)

“Be patient enough. Credit constraints, time horizons and industry dynamics”

Abstract: We build an agent-based model to analyse the impact of credit constraints on time-consuming adoption and expansion processes and on industry dynamics. The model features heterogeneous firms in a monopolistic competitive market.
In the model, firms invest according to a payback rule, either  in efficiency-enhancing technologies or in capacity expansion. These investment projects take time to be developed and external financial resources might be needed. A monopolistic bank can grant or reject the loans requested by the firms based upon their past profitability. The degree of credit rationing in the model is also affected by the bank’s degree of long-termism. By empoying extensive Monte Carlo simulations we show the emergence of a trade-off between productivity and profitability at the industry level. On the one hand, efficiency grows faster when credit constraints are loose, as more firms can adopt new technologies. On the other hand, buoyant credit conditions limit market selection by allowing the survival of inefficient firms, increasing industry competition and limiting firms’ profitability. Our results point to the importance of banks’ time horizon as a force affecting the development of new technologies and the degree of industry efficiency.