“Weird Ties”?: Growth, Cycles and Firms’ Dynamics in an Agent-Based Model with Financial Market Imperfections

In this paper, we study how the interplay between technology shocks and financial variables shapes the dynamics of economies characterized by heterogeneous agents. Most of standard economic literature has centered the analysis of decentralized economies on the representative agent hypothesis (REH), often treating short-run and long-run phenomena with distinct sets of models. However the recent empirical research on longitudinal micro level data sets has revealed a picture of business cycles and growth dynamics which is very far from the homogeneous one postulated in models based on REH. The presence of significant differences among firms, in terms of levels of investment, employment, and output as well as in productivity look as an invariant feature of modern economies. On these empirical grounds, we propose an agent-based model with financial market imperfections and costly-adoption of new technologies which is able to jointly replicate many stylized facts characterizing macroeconomic time-series as well as properties characterizing firms’ growth and productivity growth at a micro level. Such regularities emerge from the nested dynamics between short-run demand shocks and long-run productivity shocks hitting firms with heterogeneous financial endowments. In this framework, we show that productivity shocks can have asymmetric effects. Therefore they can reinforce or weaken the dynamics already induced by demand shocks. Moreover, reduction of firms’ net worth hamper firms’ ability to afford better technologies and to smooth the impact of adverse shocks. Thus, even small demand shocks can cause large and persistent fluctuations.