Small firms, borrowing constraints, and reputation

This paper presents a simple model relating firm age with firm size and access to credit markets. Lending to new firms is risky because lenders have had no time to accumulate observations about them. As a result, interest rates are high and loans are small for entering firms. As firms need credit to operate, credit markets impose a limit on the scale of operation of new firms. Reputation building by the firms allows markets to overcome these difficulties over time. Large firms face lower interest rates than small firms, and credit markets fluctuations are shown to have different effects on firms of different size