Rafael Guntin, University of Rochester

Financial Frictions and the Market for Firms

with Federico Kochen

We study and quantify the aggregate implications of the trade of firms in the presence of financial frictions. In the U.S., one out of four entrepreneurs purchased their business. In the cross-section, younger, smaller, and higher return to capital firms have the highest trading rates. To explain these findings, we propose a general equilibrium model of entrepreneurship with a frictional market for firms where gains from trade arise from credit constraints, incomplete markets, and preference shocks. Using firm-level data from several high-income countries, we document that post-trade firm dynamics are consistent with the trade of firms alleviating financial constraints, as predicted by the model. Our quantitative results for the U.S. suggest that firms’ trade significantly improves allocative efficiency, accounting for 9.1% of entrepreneurial output and 2.2% of TFP. We argue that the trade of firms can play an even more important role in less financially developed economies.