Credit horizons

John Moore, Nobuhiro Kiyotaki, Shengxing Zhang

Research output: Working paper

Abstract / Description of output

Entrepreneurs appear to raise funds largely against their near-term revenues, even when their investment has a longer horizon. To explain why, we develop a model of credit horizons in which the inalienable human capital of an entrepreneur-cum-engineer is essential for constructing and then maintaining a production plant. The further distant into the future, the larger the fraction of the revenue floow that can be attributed to the engineerís cumulative maintenance. Looking ahead from the time of investment, we see that because the engineer cannot precommit to work for less than her marginal contribution to (future) production, as time passes more of the surplus goes (has effectively already gone) to her and concomitantly less goes to financial claimants. Hence the investing engineer's fundraising capacity is largely governed by revenues in the near horizon. We use our framework to examine how credit horizons interact with plant dynamics and the evolution of productivity. We also show that a permanent fall in the interest rate in small open economy can lead to a temporary boom followed by slower growth in the long run.
Original languageEnglish
Publication statusPublished - 14 Sept 2021

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