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Quantifying Reduced-Form Evidence on Collateral Constraints

This paper provides a quantitative exploration of the aggregate effects of an important source of financing friction, collateral constraints. We develop a general equilibrium model of firm dynamics with collateral constraints and adjustment costs, which we structurally estimate using administrative data on French firms. The model is estimated using the joint firm-level dynamics of capital and labor observed following exogenous shocks to the value of collateral. We find that welfare increases by 5.4% when collateral constraints are removed. 25% of these welfare gains come from an improved allocation of inputs across heterogenous firms; 75% are derived from an aggregate increase in capital. Interestingly, removing collateral constraints has little effect on aggregate employment, as financially constrained firms tend to substitute labor for capital.