First, I de…ne the aggregate welfare as the total of household and entrepreneur’s
utility in the steady state:
W(c; h; e) =U(c; h) +U(e)
Second, I de…ne the level of welfare of the baseline model without policy as
W0(c0;h0; e0); and the welfare in the alternative model with additional policy as W1(c1;h1; e1). Then I compute consumption equivalent (CE) such that:
W0(c0(1 +CE%); h0;e0(1 +CE%)) =W1(c1; h1; e1)
Using the functional form of household utility as in equation 2.1 and the
linear utility function of entrepreneur, I can derive the consumption equivalent
as follows: log (c0(1 +CE%)) 1 +1h 1+1 0 + (1 +CE%)e0 =W1(c1; h1; e1) log(c0) + log(1 +CE%) 1 +1h 1+1 0 +e0+e0:CE% =W1(c1; h1; e1) log(1 +CE%) +e0:CE% =W1(c1; h1; e1) W0(c0; h0; e0) (6.118)
6.2.3 Detailed Results: Impact of Subsidy on Steady State Val- ues
Table 6.1: Policy 1 - Subsidy on Bank Information Acquisition Cost, Tax on Labour Income
Variables subs=0 subs=0.1 subs=0.3 subs=0.8 Trend Financial sector variables
Threshold of e_1 for approaching bank (eps bar b) 0.9952 0.9945 0.9927 0.9834 Threshold of e_1 for borrowing from CMF (eps bar c) 1.0282 1.0302 1.0348 1.0530 Share of firms that abstain from external finance (sa) 0.3893 0.3717 0.3311 0.1575 Share of firms that approacing bank (sb) 0.5651 0.5929 0.6497 0.8416 Share of firms that borrow from CMF (sc) 0.0456 0.0354 0.0192 0.0009 Share of firms that approach bank and borrow (sbp) 0.2470 0.2530 0.2606 0.2511 Share of firms that approach bank but not borrow (sb - sbp) 0.3180 0.3399 0.3890 0.5904 Aggregate bankloans/bond 5.3591 7.0746 13.4945 282.5203 Aggregate debt/equity 0.6371 0.6284 0.6103 0.5522 Risk premium CMF 0.0029 0.0028 0.0027 0.0022 Risk premium of bank 0.0030 0.0030 0.0030 0.0030 Average default of bank 0.0149 0.0150 0.0150 0.0152 Average default of CMF 0.0144 0.0141 0.0136 0.0113 Average overall default 0.0149 0.0149 0.0149 0.0152 Aggregate debt to GDP 0.6660 0.6661 0.6663 0.6672
Macroeconomic variables
Household consumption ( c) 1.0000 0.9999 0.9996 0.9964 Household deposit (d) 0.9035 0.9044 0.9063 0.9122 Household money cash (m) 0.0137 0.0137 0.0137 0.0138 Money supply (ms) 0.9172 0.9181 0.9200 0.9260 Work hours (h) 0.3259 0.3259 0.3259 0.3259 Household's capital (k) 14.3236 14.3179 14.3058 14.2435 Entrepeneur's capital (z) 1.4038 1.4248 1.4701 1.6355 Total capital (K) 15.7274 15.7427 15.7759 15.8790 Entrepreneur consumption ( e) 0.0322 0.0327 0.0337 0.0375 Firm's net worth (n) 1.4180 1.4392 1.4849 1.6520 Tax rate (t) 0.0000 0.0010 0.0034 0.0130 Real wage (w) 2.5825 2.5849 2.5903 2.6071 Real rent ( r) 0.0301 0.0301 0.0301 0.0301 Entrepreneur's funds (x) 1.3150 1.3163 1.3191 1.3277 Total output (y) 1.3565 1.3578 1.3602 1.3672 Total junk cost (information + monitoring cost, ya) 0.0098 0.0103 0.0114 0.0156 Information cost(ytau) 0.0079 0.0084 0.0095 0.0138 Monitoring cost (ym) 0.0018 0.0018 0.0018 0.0019 GDP (ynet) 1.3468 1.3475 1.3488 1.3515 Entrepreneurial markup over input cost (q) 1.0005 0.9999 0.9986 0.9945 HH Income from rent and work (1-t)*wh+rk 1.2728 1.2726 1.2720 1.2675 Tax revenue : t*w*h = total subsidy 0.0000 0.0008 0.0029 0.0110 Total consumption ( C) 1.0322 1.0326 1.0333 1.0340 Entrepreneur Investment 0.0281 0.0285 0.0294 0.0327 Household Investment 0.2865 0.2864 0.2861 0.2849 Total Investment (I) 0.3145 0.3149 0.3155 0.3176 Subsidy/GDP (%) 0.00% 0.06% 0.21% 0.81%
Table 6.2: Policy 2 - Subsidy on Bank Information Acquisition Cost, Tax on Consumption
Variables subs=0 subs 0.1 subs=0.3 subs=0.8 Trend
Financial sector variables
Threshold of e_1 for approaching bank (eps bar b) 0.9952 0.9945 0.9927 0.9834 Threshold of e_1 for borrowing from CMF (eps bar c) 1.0282 1.0302 1.0348 1.0530 Share of firms that abstain from external finance (sa) 0.3893 0.3717 0.3311 0.1575 Share of firms that approacing bank (sb) 0.5651 0.5929 0.6497 0.8416 Share of firms that borrow from CMF (sc) 0.0456 0.0354 0.0192 0.0009 Share of firms that approach bank and borrow (sbp) 0.2470 0.2530 0.2606 0.2511 Share of firms that approach bank but not borrow (sb - sbp) 0.3180 0.3399 0.3890 0.5904 Aggregate bankloans/bond 5.3591 7.0746 13.4946 282.5232 Aggregate debt/equity 0.6371 0.6284 0.6103 0.5522 Risk premium CMF 0.0029 0.0028 0.0027 0.0022 Risk premium of bank 0.0030 0.0030 0.0030 0.0030 Average default of bank 0.0149 0.0150 0.0150 0.0152 Average default of CMF 0.0144 0.0141 0.0136 0.0113 Average overall default 0.0149 0.0149 0.0149 0.0152 Aggregate debt to GDP 0.6660 0.6661 0.6663 0.6672
Macroeconomic variables
Household consumption ( c) 1.0000 0.9999 0.9995 0.9960 Household deposit (d) 0.9035 0.9049 0.9082 0.9198 Household money (cash) 0.0137 0.0137 0.0138 0.0139 Money supply (ms) 0.9172 0.9186 0.9220 0.9338 Work hours (h) 0.3259 0.3261 0.3266 0.3287 Household's capital (k) 14.3236 14.3270 14.3367 14.3632 Entrepeneur's capital (z) 1.4038 1.4257 1.4732 1.6492 Total capital (K) 15.7274 15.7527 15.8100 16.0123 Entrepreneur consumption ( e) 0.0322 0.0327 0.0337 0.0375 Firm's net worth (n) 1.4180 1.4402 1.4881 1.6658 Tax rate (t) 0.0000 0.0008 0.0028 0.0107 Real wage (w) 2.5825 2.5849 2.5903 2.6071 Real rent ( r) 0.0301 0.0301 0.0301 0.0301 Entrepreneur's funds (x) 1.3150 1.3171 1.3219 1.3389 Total output (y) 1.3565 1.3586 1.3632 1.3787 Total junk cost (information + monitoring cost, ya) 0.0098 0.0110 0.0138 0.0250 Information cost(ytau) 0.0079 0.0084 0.0096 0.0139 Monitoring cost (ym) 0.0018 0.0025 0.0042 0.0111 GDP (ynet) 1.3468 1.3477 1.3494 1.3537 Entrepreneurial markup over input cost (q) 1.0005 0.9999 0.9986 0.9945 HH Income from rent and work (wh+rk) 1.2728 1.2742 1.2776 1.2892 Tax revenue : t*(c+e) = total subsidy 0.0000 0.0008 0.0029 0.0111 Total consumption ( C) 1.0322 1.0326 1.0332 1.0334 Entrepreneur Investment 0.0281 0.0285 0.0295 0.0330 Household Investment 0.2865 0.2865 0.2867 0.2873 Total Investment I) 0.3145 0.3151 0.3162 0.3202 Subsidy/GDP (%) 0.00% 0.06% 0.21% 0.82%
Table 6.3: Policy 3 - Subsidy on Bank Information Acquisition Cost, Lumpsum Tax
Variables subs=0 subs 0.1 subs=0.3 subs=0.8 Trend Financial sector variables
Threshold of e_1 for approaching bank (eps bar b) 0.9952 0.9945 0.9927 0.9834 Threshold of e_1 for borrowing from CMF (eps bar c) 1.0282 1.0302 1.0348 1.0530 Share of firms that abstain from external finance (sa) 0.3893 0.3717 0.3311 0.1575 Share of firms that approacing bank (sb) 0.5651 0.5929 0.6497 0.8416 Share of firms that borrow from CMF (sc) 0.0456 0.0354 0.0192 0.0009 Share of firms that approach bank and borrow (sbp) 0.2470 0.2530 0.2606 0.2511 Share of firms that approach bank but not borrow (sb - sbp) 0.3180 0.3399 0.3890 0.5904 Aggregate bankloans/bond 5.3591 7.0746 13.4945 282.5203
Aggregate debt/equity 0.6371 0.6284 0.6103 0.5522
Risk premium CMF 0.0029 0.0028 0.0027 0.0022
Risk premium of bank 0.0030 0.0030 0.0030 0.0030
Average default of bank 0.0149 0.0150 0.0150 0.0152
Average default of CMF 0.0144 0.0141 0.0136 0.0113
Average overall default 0.0149 0.0149 0.0149 0.0152
Aggregate debt to GDP 0.6660 0.6661 0.6663 0.6672
Macroeconomic variables
Household consumption ( c) 1.0000 1.0007 1.0021 1.0062
Household deposit (d) 0.9035 0.9050 0.9086 0.9211
Household money (cash) 0.0137 0.0137 0.0138 0.0140
Money supply (ms) 0.9172 0.9187 0.9223 0.9351 Work hours (h) 0.3259 0.3261 0.3267 0.3291 Household's capital (k) 14.3236 14.3287 14.3423 14.3835 Entrepeneur's capital (z) 1.4038 1.4259 1.4738 1.6515 Total capital (K) 15.7274 15.7546 15.8161 16.0350 Entrepreneur consumption ( e) 0.0322 0.0327 0.0338 0.0379
Firm's net worth (n) 1.4180 1.4403 1.4887 1.6682
Tax rate (t) 0.0000 0.0008 0.0029 0.0111
Real wage (w) 2.5825 2.5849 2.5903 2.6071
Real rent ( r) 0.0301 0.0301 0.0301 0.0301
Entrepreneur's funds (x) 1.3150 1.3173 1.3224 1.3407
Total output (y) 1.3565 1.3588 1.3637 1.3806
Total junk cost (information + monitoring cost, ya) 0.0098 0.0103 0.0114 0.0158
Information cost(ytau) 0.0079 0.0085 0.0096 0.0139
Monitoring cost (ym) 0.0018 0.0018 0.0018 0.0019
GDP (ynet) 1.3468 1.3485 1.3523 1.3648
Entrepreneurial markup over input cost (q) 1.0005 0.9999 0.9986 0.9945 HH Income from rent and work (wh+rk) 1.2728 1.2744 1.2781 1.2910 Tax revenue = total subsidy 0.0000 0.0008 0.0029 0.0111
Total consumption ( C) 1.0322 1.0334 1.0360 1.0441
Entrepreneur Investment 0.0281 0.0285 0.0295 0.0330
Household Investment 0.2865 0.2866 0.2868 0.2877
Total Investment I) 0.3145 0.3151 0.3163 0.3207
Table 6.4: Policy 4 - Subsidy on Bank Monitoring Cost, Tax on Labour Income Variables subs=0 subs=0.1 subs=0.3 subs=0.8 Trend Financial sector variables
Threshold of e_1 for approaching bank (eps bar b) 0.9952 0.9952 0.9951 0.9950 Threshold of e_1 for borrowing from CMF (eps bar c) 1.0282 1.0288 1.0299 1.0331 Share of firms that abstain from external finance (sa) 0.3893 0.3887 0.3871 0.3840 Share of firms that approacing bank (sb) 0.5651 0.5687 0.5760 0.5916 Share of firms that borrow from CMF (sc) 0.0456 0.0427 0.0369 0.0244 Share of firms that approach bank and borrow (sbp) 0.2470 0.2501 0.2561 0.2698 Share of firms that approach bank but not borrow (sb - sbp) 0.3180 0.3186 0.3199 0.3218 Aggregate bankloans/bond 5.3591 5.8026 6.8623 10.9607 Aggregate debt/equity 0.6371 0.6372 0.6377 0.6398 Risk premium CMF 0.0029 0.0029 0.0028 0.0027 Risk premium of bank 0.0030 0.0028 0.0023 0.0013 Average default of bank 0.0149 0.0149 0.0149 0.0148 Average default of CMF 0.0144 0.0143 0.0141 0.0137 Average overall default 0.0149 0.0148 0.0148 0.0147 Aggregate debt to GDP 0.6660 0.6661 0.6662 0.6666
Macroeconomic variables
Household consumption ( c) 1.0000 0.9999 0.9997 0.9991 Household deposit (d) 0.9035 0.9036 0.9039 0.9046 Household money cash (m) 0.0137 0.0137 0.0137 0.0137 Money supply (ms) 0.9172 0.9173 0.9176 0.9183 Work hours (h) 0.3259 0.3259 0.3259 0.3258 Household's capital (k) 14.3236 14.3260 14.3315 14.3471 Entrepeneur's capital (z) 1.4038 1.4039 1.4032 1.3997 Total capital (K) 15.7274 15.7299 15.7347 15.7468 Entrepreneur consumption ( e) 0.0322 0.0322 0.0322 0.0321 Firm's net worth (n) 1.4180 1.4181 1.4173 1.4138 Tax rate (t) 0.0000 0.0003 0.0009 0.0026 Real wage (w) 2.5825 2.5830 2.5840 2.5866 Real rent ( r) 0.0301 0.0301 0.0301 0.0301 Entrepreneur's funds (x) 1.3150 1.3152 1.3156 1.3166 Total output (y) 1.3565 1.3566 1.3568 1.3570 Total junk cost (information + monitoring cost, ya) 0.0098 0.0099 0.0102 0.0108 Information cost(ytau) 0.0079 0.0080 0.0081 0.0083 Monitoring cost (ym) 0.0018 0.0019 0.0021 0.0026 GDP (ynet) 1.3468 1.3467 1.3466 1.3462 Entrepreneurial markup over input cost (q) 1.0005 1.0004 1.0002 0.9995 HH Income from rent and work (1-t)*wh+rk 1.2728 1.2727 1.2726 1.2724 tax revenue : t*w*h = total subsidy 0.0000 0.0003 0.0008 0.0022 Total consumption ( C) 1.0322 1.0321 1.0319 1.0313 Entrepreneur Investment 0.0281 0.0281 0.0281 0.0280 Household Investment 0.2865 0.2865 0.2866 0.2869 Total Investment (I) 0.3145 0.3146 0.3147 0.3149 Subsidy/GDP (%) 0.00% 0.02% 0.06% 0.16%
Table 6.5: Policy 5 - Subsidy on Bank Monitoring Cost, Tax on Consumption
Variables subs=0 subs 0.1 subs=0.3 subs = 0.8 Trend Financial sector variables
Threshold of e_1 for approaching bank (eps bar b) 0.9952 0.9952 0.9951 0.9950 Threshold of e_1 for borrowing from CMF (eps bar c) 1.0282 1.0288 1.0299 1.0331 Share of firms that abstain from external finance (sa) 0.3893 0.3887 0.3871 0.3840 Share of firms that approacing bank (sb) 0.5651 0.5687 0.5760 0.5916 Share of firms that borrow from CMF (sc) 0.0456 0.0427 0.0369 0.0244 Share of firms that approach bank and borrow (sbp) 0.2470 0.2501 0.2561 0.2698 Share of firms that approach bank but not borrow (sb - sbp)
Aggregate bankloans/bond 5.3591 5.8026 6.8623 10.9607 Aggregate debt/equity 0.6371 0.6372 0.6377 0.6398 Risk premium CMF 0.0029 0.0029 0.0028 0.0027 Risk premium of bank 0.0030 0.0028 0.0023 0.0013 Average default of bank 0.0149 0.0149 0.0149 0.0148 Average default of CMF 0.0144 0.0143 0.0141 0.0137 Average overall default 0.0149 0.0148 0.0148 0.0147 Aggregate debt to GDP 0.6660 0.6661 0.6662 0.6666
Macroeconomic variables
Household consumption ( c) 1.0000 0.9999 0.9997 0.9991 Household deposit (d) 0.9035 0.9038 0.9044 0.9060 Household money cash (m) 0.0137 0.0137 0.0137 0.0137 Money supply (ms) 0.9172 0.9175 0.9181 0.9198 Work hours (h) 0.3259 0.3259 0.3260 0.3263 Household's capital (k) 14.3236 14.3287 14.3398 14.3703 Entrepeneur's capital (z) 1.4038 1.4041 1.4040 1.4019 Total capital (K) 15.7274 15.7328 15.7438 15.7722 Entrepreneur consumption ( e) 0.0322 0.0322 0.0322 0.0321 Firm's net worth (n) 1.4180 1.4183 1.4181 1.4161 Tax rate (t) 0.0000 0.0002 0.0007 0.0021 Real wage (w) 2.5825 2.5830 2.5840 2.5866 Real rent ( r) 0.0301 0.0301 0.0301 0.0301 Entrepreneur's funds (x) 1.3150 1.3155 1.3164 1.3188 Total output (y) 1.3565 1.3569 1.3575 1.3592 Total junk cost (information + monitoring cost, ya) 0.0098 0.0101 0.0108 0.0126 Information cost(ytau) 0.0079 0.0080 0.0081 0.0083 Monitoring cost (ym) 0.0018 0.0021 0.0027 0.0043 GDP (ynet) 1.3468 1.3468 1.3468 1.3466 Entrepreneurial markup over input cost (q) 1.0005 1.0004 1.0002 0.9995 HH Income from rent and work (wh+rk) 1.2728 1.2732 1.2741 1.2766 Tax revenue : t*(c+e) = total subsidy 0.0000 0.0003 0.0008 0.0021 Total consumption ( C) 1.0322 1.0321 1.0319 1.0312 Entrepreneur Investment 0.0281 0.0281 0.0281 0.0280 Household Investment 0.2865 0.2866 0.2868 0.2874 Total Investment (I) 0.3145 0.3147 0.3149 0.3154 Subsidy/GDP (%) 0.00% 0.02% 0.06% 0.16%
Table 6.6: Policy 6 - Subsidy on Bank Monitoring Cost, LumpsumTax
Variables subs=0 subs 0.1 subs=0.3 subs = 0.8 Trend
Financial sector variables
Threshold of e_1 for approaching bank (eps bar b) 0.9952 0.9952 0.9951 0.9950 Threshold of e_1 for borrowing from CMF (eps bar c) 1.0282 1.0288 1.0299 1.0331 Share of firms that abstain from external finance (sa) 0.3893 0.3887 0.3871 0.3840 Share of firms that approacing bank (sb) 0.5651 0.5687 0.5760 0.5916 Share of firms that borrow from CMF (sc) 0.0456 0.0427 0.0369 0.0244 Share of firms that approach bank and borrow (sbp) 0.2470 0.2501 0.2561 0.2698 Share of firms that approach bank but not borrow (sb - sbp) 0.3180 0.3186 0.3199 0.3218
Aggregate bankloans/bond 5.3591 5.8026 6.8623 10.9607
Aggregate debt/equity 0.6371 0.6372 0.6377 0.6398
Risk premium CMF 0.0029 0.0029 0.0028 0.0027
Risk premium of bank 0.0030 0.0028 0.0023 0.0013
Average default of bank 0.0149 0.0149 0.0149 0.0148
Average default of CMF 0.0144 0.0143 0.0141 0.0137
Average overall default 0.0149 0.0148 0.0148 0.0147
Aggregate debt to GDP 0.6660 0.6661 0.6662 0.6666
Macroeconomic variables
Household consumption ( c) 1.0000 1.0001 1.0004 1.0011
Household deposit (d) 0.9035 0.9038 0.9045 0.9063
Household money cash (m) 0.0137 0.0137 0.0137 0.0137
Money supply (ms) 0.9172 0.9175 0.9182 0.9200 Work hours (h) 0.3259 0.3260 0.3261 0.3264 Household's capital (k) 14.3236 14.3292 14.3414 14.3745 Entrepeneur's capital (z) 1.4038 1.4042 1.4041 1.4023 Total capital (K) 15.7274 15.7334 15.7455 15.7768 Entrepreneur consumption ( e) 0.0322 0.0322 0.0322 0.0322
Firm's net worth (n) 1.4180 1.4184 1.4183 1.4165
Tax rate (t) 0.0000 0.0003 0.0008 0.0021
Real wage (w) 2.5825 2.5830 2.5840 2.5866
Real rent ( r) 0.0301 0.0301 0.0301 0.0301
Entrepreneur's funds (x) 1.3150 1.3155 1.3165 1.3192
Total output (y) 1.3565 1.3569 1.3577 1.3596
Total junk cost (information + monitoring cost, ya) 0.0098 0.0099 0.0102 0.0108
Information cost(ytau) 0.0079 0.0080 0.0081 0.0083
Monitoring cost (ym) 0.0018 0.0019 0.0021 0.0025
GDP (ynet) 1.3468 1.3470 1.3475 1.3488
Entrepreneurial markup over input cost (q) 1.0005 1.0004 1.0002 0.9995 HH Income from rent and work (wh+rk) 1.2728 1.2733 1.2743 1.2769
Tax revenue : t = total subsidy 0.0000 0.0003 0.0008 0.0021
Total consumption ( C) 1.0322 1.0324 1.0326 1.0332
Entrepreneur Investment 0.0281 0.0281 0.0281 0.0280
Household Investment 0.2865 0.2866 0.2868 0.2875
Total Investment (I) 0.3145 0.3147 0.3149 0.3155