Search Results
Working Paper
Aggregate Consequences of Dynamic Credit Relationships
Which financial frictions matter in the aggregate? This paper presents a general equilibrium model in which entrepreneurs finance a firm with a long-term contract. The contract is constrained efficient because firm revenue is costly to monitor and entrepreneurs may default. The cost of monitoring firms and the entrepreneurs' outside options determine the significance of moral hazard relative to limited enforcement for financial contracting. Calibrating the model to the U.S. economy, I find that the relative welfare loss from financial frictions is about 5 percent in terms of aggregate ...
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Nonlinear Firm Dynamics
This paper presents empirical evidence on the nature of idiosyncratic shocks to firms and discusses its role for firm behavior and aggregate fluctuations. We document that firm-level sales and productivity are hit by heavy-tailed shocks and follow a nonlinear stochastic process, thus departing from the canonical linear. We estimate a state-of-the-art model to flexibly capture the rich dynamics uncovered in the data and characterize the drivers of nonlinear persistence and non-Gaussian shocks. We show that these features are crucial to get empirically plausible volatility and persistence of ...
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Brand Reallocation and Market Concentration
We study the interaction of customer capital and productivity through brand reallocation across firms. We develop a firm dynamics model with brands as transferable customer capital, heterogeneous firm productivity, and variable markups. We study the matching process between transferable brand capital and core productivity, which can be inefficient with significant welfare implications. We link USPTO trademark data with Nielsen sales data to study the prevalence of brand reallocation and the response of sales and prices to reallocation. Quantitatively, brand reallocation reduces welfare. ...
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Firm Dynamics and Random Search over the Business Cycle
I build a tractable random search model with firm dynamics, on-the-job search, and aggregate shocks. Multi-worker firms make recruitment decisions, choose whether to enter or exit the market, and design wage contracts. Tractability is obtained by showing that, under a set of assumptions on the recruitment technology, the decisions of workers and firms depend on the firms’ current productivity. I confront the model to salient business cycle moments on the reallocation of workers across the firm productivity distribution derived from firm-level data that the model successfully replicates. I ...
Working Paper
Barriers to Creative Destruction: Large Firms and Nonproductive Strategies
This working paper reviews recent empirical evidence on large firms and nonproductivestrategies that hinder creative destruction and reallocation. The focus is on three types ofnonproductive strategies: political connections, nonproductive patenting, and anticompetitiveacquisitions. Across different contexts using granular micro data sets, we overwhelmingly see that asfirms gain market share, they increasingly rely on nonproductive strategies but reduce theirproductive, innovation-based strategies. I also discuss theoretical channels, aggregate implications,and potentials for some policies.
Working Paper
The Firm Size and Leverage Relationship and Its Implications for Entry and Business Concentration
Larger firms (by sales or employment) have higher leverage. This pattern is explained using a model in which firms produce multiple varieties and borrow with the option to default against their future cash flow. A variety can die with a constant probability, implying that bigger firms (those with more varieties) have a lower coefficient of variation of sales and higher leverage. A lower risk-free rate benefits bigger firms more as they are able to lever more and existing firms buy more of the new varieties arriving into the economy. This leads to lower startup rates and greater concentration ...
Working Paper
The Micro and Macro Dynamics of Capital Flows
We study empirically and theoretically the effects of international financial flows on resource allocation. Using the universe of firms in Hungary, we show that removing capital controls lowers firms’ cost of capital and increases household consumption, with the latter playing a dominant role. The consumption channel leads to reallocation of resources toward high expenditure elasticity activities—such as services—promoting both the expansion of incumbents and firm entry. A multi-sector heterogeneous firm model replicates these dynamics. Our model shows that non-homotheticity in ...
Working Paper
The Firm Size-Leverage Relationship and Its Implications for Entry and Business Concentration
Larger firms (by sales or employment) have higher leverage. This pattern is explained using a model in which firms produce multiple varieties, acquire new varieties from their inventors, and borrow against the future cash flow of the firm with the option to default. A variety can die with a constant probability, implying that firms with more varieties (bigger firms) have a lower variance of sales growth and, in equilibrium, higher leverage. In this setup, a drop in the risk-free rate increases the value of an acquisition more for bigger firms because of their higher leverage: They can (and ...
Working Paper
Weathering the Storm: Supply Chains and Climate Risk
We characterize how firms structure supply chains under climate risk. Using new data on the universe of firm-to-firm transactions from an Indian state, we show that firms diversify sourcing locations, and suppliers exposed to climate risk charge lower prices. Our event-study analysis finds that firms with suppliers in flood-affected districts experience a decline in inputs lasting two months, followed by a return to original suppliers. We develop a general equilibrium model of firm input sourcing under climate risk. Firms diversify identical inputs from suppliers across space, trading off the ...
Working Paper
The Firm Size and Leverage Relationship and Its Implications for Entry and Concentration in a Low Interest Rate World
Larger firms (by sales or employment) have higher leverage. This pattern is explained using a model in which firms produce multiple varieties and borrow with the option to default against their future cash ow. A variety can die with a constant probability, implying that bigger firms (those with more varieties) have lower coefficient of variation of sales and higher leverage. A lower risk-free rate benefits bigger firms more as they are able to lever more and existing firms buy more of the new varieties arriving into the economy. This leads to lower startup rates and greater concentration of ...