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

ArXiv ID: 2501.12700 “View on arXiv”

Authors: Unknown

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.

Keywords: aggregate production, financial frictions, credit limits, productivity, equilibrium non-monotonicity, Macro Economy

Complexity vs Empirical Score

  • Math Complexity: 9.0/10
  • Empirical Rigor: 1.0/10
  • Quadrant: Lab Rats
  • Why: The paper is heavily theoretical, using advanced general equilibrium theory, existence proofs, and dynamic optimization techniques with significant mathematical density. However, it presents no empirical data, backtests, or implementation details, focusing solely on theoretical propositions and proofs.
  flowchart TD
    A["Research Goal: How do productivity & credit constraints affect aggregate output in economies with heterogeneous producers?"] --> B["Methodology: General Equilibrium Model with Frictions"]
    
    B --> C1["Data/Inputs: Individual Heterogeneity"]
    B --> C2["Data/Inputs: Financial Frictions"]
    B --> C3["Data/Inputs: Market Equilibrium"]
    
    C1 --> D["Computational Process: Solve for Equilibrium Allocation"]
    C2 --> D
    C3 --> D
    
    D --> E["Key Finding 1: Aggregate output depends on distribution of individual traits"]
    D --> F["Key Finding 2: Non-monotonic effects of productivity on output"]
    D --> G["Key Finding 3: Non-monotonic effects of credit limits on output"]
    D --> H["Key Finding 4: Improving factors may harm economic development"]