The Financing of Ideas and the Great Deviation

Résumé

Why did the Great Recession lead to such a slow recovery? I build a model where heterogeneous firms invest in physical and in intangible capital, and can default on their debt. In case of default, intangible assets are harder to seize by external investors. Hence, financing intangible capital faces higher costs than financing physical capital. This differential is exacerbated in a financial crisis, when default is more likely and aggregate risk bears a higher premium. The resulting fall in intangible investment amplifies the financial crisis, and gradual intangible capital spillovers to other firms contribute to its persistence. Using a rich panel dataset of Spanish manufacturing firms, I estimate the model by matching firm-level moments regarding physical and intangible investment and financing. The model captures the extent and components of the Great Recession, as incumbent intangible investment falls and firm exit rates surge. A standard model without endogenous intangible investment would miss half of the 2008-2013 GDP fall in Spanish manufacturing. Targeted fiscal policy could speed up the recovery: transfers to young firms relax the borrowing constraints of the firms with higher returns to investment and mitigate the fall in GDP.