Zombies? Growth Options, Heterogene ous Firms, and the Allocative Effects of Zombie Lending"
Abstract:
We develop a model with firm dynamics, imperfect competition, and growth options. Firms borrow using credit lines offered by competitive lenders tha t can optimally provide zombie lending (that is, reducing the interest rate on borrowing below the risk free rate). We solve and calibrate the model a nd show that zombie lending is used in equilibrium to subsidise two very di fferent types of firms: ``stagnant zombies'' previously borrowed to fund pr ojects that are no longer feasible. They are offered zombie lending so that they can gradually reduce their debt and avoid default. ``high-potential z ombies'' have growth options and borrow to pursue them. Zombie lending ``bu ys them more time'', in the hope they will become more profitable in the fu ture and will thus be able to repay the debt. The main insight of the model is that while both types of zombie firms are consistent with the way such firms are usually identified in the empirical literature, they have opposit e implications for misallocation and aggregate productivity and welfare. We use the model to propose novel criteria to identify the different zombie t ypes and new testable predictions of their allocative effects: i) An increa se in markup dispersion within industries should increase the share of zomb ie firms and the share of zombies that in the future recover and reach top quartile performance. ii) Sectors where zombies behave like high-potential ones should exhibit positive TFP responses to zombie prevalence, while thos e dominated by stagnant zombies should show declining productivity. Using f irm-level data from Italian firms between 2007-2016, we provide robust empi rical evidence confirming these predictions.
DTSTAMP:20260429T054617Z DTSTART:20251204T163000Z DTEND:20251204T180000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR