We build a static general-equilibrium model with monopolistically competitive firms that borrow funds from competitive banks in an economy subject to financial frictions. These frictions are due to non verifiability of both ex post firm returns and managerial effort. Market power has opposing...

One of the most significant characteristics of optimizing models is that the behavioral equations involved are typically forward looking, i.e., agents are concerned about the future rather than the past. This creates difficulties when modelling some of the business-cycle patterns widely observed...