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Working Paper
Credit Misallocation and Macro Dynamics with Oligopolistic Financial Intermediaries
Bank market power shapes firm investment and financing dynamics and hence affects the transmission of macroeconomic shocks. Motivated by a secular increase in the concentration of the US banking industry, I study bank market power through the lens of a dynamic general equilibrium model with oligopolistic banks and heterogeneous firms. The lack of competition allows banks to price discriminate and charge firm-specific markups in excess of default premia. In turn, the cross-sectional dispersion of markups amplifies the impact of macroeconomic shocks. During a crisis, banks exploit their market ...
Working Paper
Optimal Financial Contracting and the Effects of Firm’s Size
We consider the design of the optimal dynamic policy for a firm subject to moral hazard problems. With respect to the existing literature we enrich the model by introducing durable capital with partial irreversibility, which makes the size of the firm a state variable. This allows us to analyze the role of firm’s size, separately from age and financial structure. We show that a higher level of capital decreases the probability of liquidation and increases the future size of the firm. Althoughanalytical results are not available, we show through simulations that, conditional on size, the ...
Working Paper
Levered Returns and Capital Structure Imbalances
We revisit the relation between equity returns and financial leverage through the lens of a dynamic trade-off model with costly capital structure rebalancing. The model predicts that expected equity returns depend on whether a firm's leverage is above or below its target leverage. We provide empirical evidence in support of the model predictions. Controlling for leverage, overlevered (underlevered) firms earn higher (lower) returns. A quantitative version of our model reproduces key facts about capital structure rebalancing and equity returns for U.S. corporations. Overall, our results ...
Working Paper
Investment-Goods Market Power and Capital Accumulation
We develop a model of capital accumulation in an economy that imports investment goods from large firms with market power. We model investment-goods producers as a dynamic oligopoly and characterize the equilibrium with a Generalized Euler Equation. We use this characterization to analyze the evolution of investment and prices. The markup on investment goods acts as an endogenous adjustment cost,which decreases as the economy grows. We calibrate the model to simulate the post-2020 shocks to demand for semiconductors. The model attributes the equipment-price increase mainly to increasing ...