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Title: The Aggregate Consequences of Default Risk: Evidence from Firm-level Data

Authors: Tim Besley, Peter John Lambert, Isabelle Roland, John Van Reenen

Abstract: We examine the impact of firm-level default risk on aggregate economic performance. First, we develop a micro-to-macro model, and show that firms' perceived default risk serves as a sufficient statistic for credit frictions. We next use this model to quantify the impact of credit frictions, leveraging administrative data on the population of UK employer firms, augmented with a measure of default risk from S&Ps widely used algorithm. Between 2004-2019, credit frictions reduce aggregate output by up to 27%. This output gap due to frictions grew post-financial crisis and again after the Brexit vote. We compare partial and general equilibrium impacts, showing that approaches that abstract equilibrium wage rises significantly over-estimate output gains. Finally, reduced frictions and higher wages create both winners and losers across industries and firm-size groups, highlighting the redistributive role of the uneven access to credit.