Events

Economics Seminar

Authors:

• Andres Almazan
  University of Texas

• Adolfo De Motta
  McGill University

• Sheridan Titman
  University of Texas

We analyze the financing and liquidation decisions of firms that face a labor market with search frictions. In our model, debt facilitates the process of creative destruction (i.e., the elimination of inefficient firms and the creation of new firms) but may induce excessive liquidation and unemployment; in particular, during economic downturns. Within this setting we examine policy interventions that influence the firms' financing and liquidation choices. Specifically, we consider the role of monetary policy, which can reduce debt burdens during economy-wide downturns, and tax policy, which can influence the incentives of firms to use debt financing.