Tehran Institute for Advanced Studies (TEIAS)

/ Firm Dynamics in Spatial Equilibrium with a Competitive Credit Market __ Claudio Michelacci


Firm Dynamics in Spatial Equilibrium with a Competitive Credit Market

Claudio Michelacci

April 19, 2023
(30 Farvardin, 1402)



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April 18, 2023

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Professor Claudio Michelacci

Full professor at CEMFI


We study the dynamic effects of business creation subsidies in an analytically tractable firm life cycle model with long-term debt, geographical variation in business idiosyncratic risk and worker mobility. Firms are initially financially constrained but after entry they have access to a perfectly competitive credit market, which gives them incentives to (over)borrow to dilute the value of past debt, at the cost of greater bankruptcy risk. We use the model to study the effects of the recent “I Stay in the South” business creation subsidy, specifically targeted to stimulate aggregate activity in the South of Italy and retain the labour force locally. Given the financial frictions, the subsidy was close to optimal. Absent financial frictions, the optimal subsidy would have been fifty percent larger: overborrowing tends to cause excessive entry, and makes the subsidy less expansionary because of higher bankruptcy rates. Both effects are amplified by the abundant cheap credit of the last decade.



I am a Research Fellow at CEPR, was previously full professor at CEMFI and have held visiting appointments at MIT, University of Southern California, the London School of Economics and the University College London. My research focuses on the functioning of labor markets, the analysis of business cycles, the determinants of the Italian productivity slow down and regional disparities. In these fields, I have edited books, organized academic conferences, and published several articles in top academic journals. I have participated in several research projects funded by the European Research Council, the Spanish Minister of Economics and the Ramon Areces Foundation. I have been Editor of the Journal of the European Economic Association and the Spanish Economic Review. I have been member of the European Standing Committee of the Econometric Society and served in the Executive Committee of the European Economic Association. I have been a driving force behind the launch of the Rome Master Economics (RoME), and of the Rome Economics Doctorate (RED), a PhD program that completes the graduate track starting with the RoME program. These initiatives are a token of my dedication to nurture the younger talents.