Coase Lecture ‐ The Inverted‐U Relationship Between Credit Access and Productivity Growth

TLDR

Credit access has two counteracting effects on productivity growth: it facilitates innovation for entrepreneurs but also lets less efficient incumbents stay longer, discouraging entry of more efficient innovators. The study develops a simple model of firm dynamics and innovation‑based growth with credit constraints to examine the inverted‑U relationship between credit access and productivity growth. The authors develop this model, test it on a comprehensive French manufacturing firm‑level dataset, and use the 2012 Eurosystem Additional Credit Claims programme as a quasi‑experiment to generate exogenous credit supply for incumbent firms. Sectoral data reveal an inverted‑U relationship between credit constraints and productivity growth, while firm‑level analysis shows that incumbent firms with easier credit access grow faster but exit less, especially the least productive ones.

Abstract

We identify two counteracting effects of credit access on productivity growth: on the one hand, better access to credit makes it easier for entrepreneurs to innovate; on the other hand, better credit access allows less efficient incumbent firms to remain longer on the market, thereby discouraging entry of new and potentially more efficient innovators. We first develop a simple model of firm dynamics and innovation‐based growth with credit constraints, where the above two counteracting effects generate an inverted‐U relationship between credit access and productivity growth. Then we test our theory on a comprehensive French manufacturing firm‐level dataset. We first show evidence of an inverted‐U relationship between credit constraints and productivity growth when we aggregate our data at the sectoral level. We then move to firm‐level analysis, and show that incumbent firms with easier access to credit experience higher productivity growth, but that they also experience lower exit rates, particularly the least productive firms among them. To support these findings, we exploit the 2012 Eurosystem's Additional Credit Claims programme as a quasi‐experiment that generated an exogenous extra supply of credits for a subset of incumbent firms.