Edward Conard

Top Ten New York Times Bestselling Author

  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

AI Summary. Lenders have incentives to offer more favorable terms to firms close to default in order to recover past investment, and U.S. loan-level data indicate that such "evergreening" lets less productive, more indebted firms borrow at relatively better terms. A dynamic model of the U.S. economy estimates that evergreening lowers borrowing rates, raises debt levels, and depresses overall productivity.

Miguel Faria-e-Castro, Pascal Paul, and Juan Sánchez Federal Reserve Bank of San Francisco
Date Posted:

Banks lend to firms to help them recover sunk costs. Between 2014-19, bank lending to zombie firms reduced economy-wide productivity by 0.25%. @mfariacastro @vediense @pascalpaul

Do banks lending to distressed firms depress overall productivity?

Core argument: The authors find that evergreening lets firms with worse fundamentals—less productive and more indebted—borrow at relatively better terms, as lenders offer favorable terms to keep firms close to default alive and recover past investment.

Our study builds on an intuitive idea: to recover its past investment, a lender has incentives to offer more favorable lending terms to a firm close to default to keep the firm alive. In contrast to standard intuition, we find that evergreening allows a firm with worse fundamentals—less productive and with more debt—to borrow at relatively better terms. Based on detailed U.S. loan-level data for the years 2014-19, we provide empirical support for our theory at a time when the banks were relatively well capitalized and the economy was growing steadily. Using a dynamic model of the U.S. economy, we find that evergreening has material effects on the performance of the overall economy, resulting in lower borrowing rates, higher levels of debt, and depressed overall productivity.

Takeaways by Macro Roundup® AI

  1. The authors find that evergreening lets firms with worse fundamentals—less productive and more indebted—borrow at relatively better terms, as lenders offer favorable terms to keep firms close to default alive and recover past investment.
  2. Using U.S. loan-level data for 2014–19, a period of relatively well-capitalized banks and steady growth, the authors provide empirical support for their theory of lending to distressed firms.
  3. In a dynamic model of the U.S. economy, the authors find evergreening materially affects aggregate performance, producing lower borrowing rates, higher debt levels, and depressed overall productivity.

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