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Mr. Rodríguez-Delgado is an Economist in the Western Hemisphere Division of the IMF Institute. I thank Timothy J. Kehoe and Cristina Arellano for their constant encouragement and advice. Jose Victor Rios-Rull, Martin Schneider, Fabrizio Perri, Erem Atesagaoglu, Alma Romero-Barrutieta and Murat Seker provided many useful suggestions. Maria Julia Gutierrez provided excellent editorial assistance. The usual disclaimer applies
Hennessy and Whited (2007) present a model in which the lender takes posession of the operating firms and may decide to re-finance the firm adjusting its equity value.
See Arellano, Bai and Zhang (2007) for an example of the combination of equity and defaultable debt. Not allowing savings is for technical reasons only. It is also common to assume that the discount factor of the risk-neutral firms to be such that they prefer dividends today (cf. Bayer, 2006).
In particular, BKU (x = (0, 0, z)) = 0
I use χ to denote the indicator function. So that χ (Condition) takes value of 1 when the Condition is met and zero otherwise.
The case of a firm with no physical assets choosing to file for liquidation is of no interest for the lender.
My definition of efficiency is different than the one used in Djankov, et al. (2006) that is centered in whether the defaulting firm is correctly identified as going concern or piecemeal sale.
In the computations, that used finite grids, a higher autocorrelation coefficient impacted the capital policy functions in such a way that a wider grid of capital values was required. To make the calibration more manageable, I lowered this value to ensure the predefined grids were not binding for any of the parameter values.
Conditional on not being hit by the disruption shock all along.
To make the simulations comparable, when a firm exited the market endogenously I restarted it with zero capital and zero debt but inheriting the sequence of productivity shocks.
The productivity distribution of entrants for μ = 45% and μ = 25% were identical.