(Non-Monotonic) Effects of Productivity and Credit Constraints on Equilibrium Aggregate Production in General Equilibrium Models with Heterogeneous Producers

Abstract

We show that, in a market economy, the aggregate production level depends not only on the aggregate variables but also on the distribution of individual characteristics (e.g., productivity, credit limit, ...). We prove that, due to financial frictions, the equilibrium aggregate production may be non-monotonic in both individual productivity and credit limit. We provide conditions (based on exogenous parameters) under which this phenomenon happens. By consequence, improving productivity or relaxing credit limit of firms may not necessarily be beneficial to economic development.