In our model, short-sighted policy-makers choose to subsidize productive entrepreneurs to relax their limited commitments. In the short-run, this policy reallocates capital from unproductive towards productive entrepreneurs, and boosts per-capita income, TFP and capital accumulation. Over time,...

We take an off-the-shelf model with financial frictions and heterogeneity, and study the mapping from a credit crunch, modeled as a shock to collateral constraints, to simple aggregate wedges. We study three variants of this model that only differ in the form of underlying heterogeneity. We find...

We take an off-the-shelf model with financial frictions and heterogeneity, and study the mapping from a credit crunch, modeled as a shock to collateral constraints, to simple aggregate wedges. We study three variants of this model that only differ in the form of underlying heterogeneity. We find...

We take an off-the-shelf model with financial frictions and heterogeneity, and study the mapping from a credit crunch, modeled as a shock to collateral constraints, to simple aggregate wedges. We study three variants of this model that only differ in the form of underlying heterogeneity. We find...

Market failures provide a rationale for policy intervention. But policies are often hard to alter once in place. We argue that this inertia can result in well-intended policies having sizable negative long-run effects on aggregate output and productivity. In our theory, financial frictions...

In a small open economy, financial frictions in the tradable sector justify a policy intervention which in the short run reduces wages and increases the supply of labor to this sector. Such a policy leads to faster entrepreneurial wealth accumulation, and less resource misallocation and higher...