In our model, an initial improvement in the prospects for having higher future productivity growth generates the following set of reactions. First, the market value of firms is driven up by the increase in the expected discounted value of profits. Because of the higher market value, new firms find their financing constraints relaxed and are able to operate with a higher initial capital investment and employment. At the aggregate level, the increase in labor demand from the new firms pushes up wage rates and forces existing unconstrained firms to adjust their production plans to increase the marginal productivity of labor. Therefore, while newer and smaller firms expand their employment,.
