A new Federal Reserve paper by Luca Guerrieri, Jinill Kim, and Arsenii Mishin explores why, within specific industries, the most productive firms outpace the least productive, a gap that widens during economic downturns. The authors build a representative‑agent model in which financial frictions—adverse selection and moral hazard—cause firms to sort endogenously into lenders, strategic defaulters, and producers. As credit conditions change, this misallocation gives aggregate total‑factor productivity an endogenous component that explains about 30 percent of its business‑cycle‑frequency variance, one‑third of which comes from strategic default. The model reproduces key features of observed productivity dispersion and its joint movements with output growth and credit conditions. DOI: https://doi.org/10.17016/FEDS.2026.047
Made by AI. If you spot anything of concern write us at contact@cybach.com. We’ll promptly correct irregularities.