Joint work with Francesco Del Prato. Under review.
Abstract. We study informational financial frictions in heterogeneous firm economies with monopolistic competition.We extend the Melitz model by introducing banks that finance entrepreneurs under asymmetric information. While aggregate productivity decreases with information frictions, welfare can be maximized at intermediate levels of asymmetry due to a trade-off between productivity and product variety. Furthermore, moderate input cost distortions can improve welfare when financial frictions are severe by offsetting the resulting weak firm selection.