Debt, Labor Markets, and the Creation and Destruction of Firms
We analyze the financing and liquidation decisions of firms that face a labor market with search. In our model, debt facilitates the process of creative destruction (i.e., the elimination of inecient firms and the creation of new firms) but may induce excessive liquidation and unemployment; in particular, during economic downturns. Within this setting we examine the role of monetary policy, which can reduce debt burdens during economy-wide downturns, and tax policy, which can influence the incentives of firms to use debt financing.
Andres Almazan, Adolfo de Motta, and Sheridan Titman