Financial imperfections and dynamics of the credit market.

Summary In this paper, we analyze the effect of firms' access to credit on their actual decisions and fluctuations. The presence of financial imperfections prevents agents from smoothing their expenditures over time or from one state of nature to another. We focus on the fluctuations of the bankruptcy rate in the economy, on their origins and their allocative consequences. The modeling we use allows us to shed light on the degree of credit risk exposure of banks, which has been a major feature of banking crises in developed countries over the past fifteen years. The risk of bank assets is then related to other macroeconomic variables and to the degree of interbank competition. We show that the decline in the interest rate tends to reduce the incentive of banks to select efficient projects and that competition can have adverse effects on aggregate risk. The evolution of credit risk is also the result of borrowers' behavior. In a second step, we analyze the incentive of firms to finance themselves by credit in an imperfect informational universe. We show that the presence of inter-firm credit is a significant factor of the bankruptcy rate in the economy because of the emergence of a system risk. We then examine the extent to which inter-firm financial connections propagate aggregate shocks. Finally, we study the effect of information asymmetries on the investment behavior of firms when they cannot diversify their financial assets in order to reduce their risk. We show that credit financing, although representing an optimal mode of financing in such an environment, does not allow to dampen economic shocks.