Cyclical Fluctuations, Financial Frictions, and Productivity Differences across Firms

June 2026

Cyclical Fluctuations, Financial Frictions, and Productivity Differences across Firms

Luca Guerrieri, Jinill Kim, and Arsenii Mishin

Abstract:

Within narrowly defined industries, the most productive firms produce far more than the least productive from the same inputs, and this dispersion widens in downturns. We build a tractable representative-agent model in which financial frictions-adverse selection and moral hazard-make firms sort endogenously into lenders, strategic defaulters, and producers. As credit conditions vary, the resulting misallocation gives aggregate total factor productivity (TFP) an endogenous component that accounts for about 30 percent of the variance of TFP at business-cycle frequencies, a third of it from strategic default. We show that our tractable model can match key features of the observed distribution of productivity across firms and its co-movement with output growth and credit conditions in the data.

Keywords: Productivity dispersion, endogenous productivity, financial intermediation, business cycles

DOI: https://doi.org/10.17016/FEDS.2026.047

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