TY  - JOUR
AU  - Russ,Katheryn N.
AU  - Valderrama,Diego
TI  - A Theory of Banks, Bonds, and the Distribution of Firm Size
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15454
PY  - 2009
Y2  - October 2009
UR  - http://www.nber.org/papers/w15454
L1  - http://www.nber.org/papers/w15454.pdf
N1  - Author contact info:
Katheryn Russ
Department of Economics
University of California, Davis
One Shields Avenue
Davis, CA 95616
Fax: 530/752-9382
E-Mail: knruss@ucdavis.edu

Diego Valderrama
4018 Cesar Chavez Street
San Francisco, CA  94131
Tel: 415-335-9694
E-Mail: dv10@cornell.edu
AB  - We draw on stylized facts from the finance literature to build a model where altering the relative costs of bank and bond financing changes the entire distribution of firm size, with implications for the aggregate capital stock, output, and welfare.   Reducing transactions costs in the bond market increases the output and profits of mid-sized firms  at the expense of both the largest and smallest firms.  In contrast, reducing the frictions involved in bank lending promotes the expansion of the smallest firms while all other firms shrink, even as it increases the profitability of both small and mid-size firms.  Although both policies increase aggregate output and welfare, they have opposite effects on the extensive margin of production---promoting bond issuance causes exit while cheaper bank credit induces entry.  When reducing transactions costs in one market, the resulting increase in output and welfare are largest when transactions costs in the other market are very high.
ER  -