A Simple Model of Endogenous Growth with Financial Frictions and Firm Heterogeneity

Abstract

This paper constructs a simple model of endogenous growth with financial frictions and firm heterogeneity. In the presence of financial constraints and heterogeneity in production efficiency of firms, the firms whose efficiency exceeds the cutoff level produce and the entrepreneurs who own those firms become borrowers. We show that even if production technology of each firm has an Ak property, the aggregate economy has transition dynamics and that the balanced growth rate depends on the aggregate distribution of wealth between rentiers and entrepreneurs.