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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 ...
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Pricing Inequality
This paper studies household inequality and product market power in dynamic, general equilibrium. In our model, households’ price elasticities of demand endogenously vary with wealth. Heterogeneous firms set their price as oligopolistic competitors given the endogenous distribution of demand. A firm’s market power varies with the distribution of demand as households with different elasticities sort into high- and low-price varieties. Under standard preferences, larger firms’ products are more appealing, sell at higher prices, to more households, and a relatively richer customer base, ...
Working Paper
Entry, Variable Markups, and Business Cycles
The creation of new businesses declines in recessions. In this paper, I study the effects of pro-cyclical business formation on aggregate employment in a general equilibrium model of firm dynamics. The key features of the model are that the elasticity of demand faced by firms falls with their market share and that adjustment costs slow the reallocation of employment between firms. In response to a decline in entry, incumbent firms' market shares increase, their elasticity of demand falls, and they increase their markups and reduce employment. To quantify the model, I study the relationship ...
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Firms’ Precautionary Savings and Employment during a Credit Crisis
Can the macroeconomic effects of credit supply shocks be large even when a small share of firms are credit-constrained? I use U.K. firm-level accounting data to discipline a heterogeneous-firm model where the interaction between real and financial frictions induces precautionary cash holdings. In the data, firms increased their cash ratios during the last recession, and cash-intensive firms displayed higher employment growth. A tightening of firms’ credit conditions generates the same dynamics in the model. Unconstrained firms pre-emptively respond to credit supply shocks; this ...
Working Paper
Firm Heterogeneity and the Impact of Immigration: Evidence from German Establishments
We use a detailed establishment-level dataset from Germany to document a new dimension of firm heterogeneity: large firms spend a higher share of their wage bill on immigrants than small firms. We show analytically that ignoring this heterogeneity in the immigrant share leads to biased estimates of the welfare gains from immigration. To do so, we set up and estimate a model where heterogeneous firms choose their immigrant share and then use it to quantify the welfare effects of an increase in the number of immigrants in Germany. Two new adjustment mechanisms arise under firm ...
Working Paper
Forward Looking Exporters
This paper studies the role of expectations in driving export adjustment. We assemble bilateral data on spot exchange rates, one year ahead exchange rate forecasts and HS2-product export data for 11 exporting countries and 64 destinations, covering the 2006–2014 period. Results from fixed effects regressions and an instrumental variables approach show that expectations of exchange rate changes are an important channel for export adjustment. A one percent expected exchange rate depreciation over the next year is associated with a 0.96 percent increase in the extensive margin (entry of new ...
Working Paper
What Does Financial Crisis Tell Us About Exporter Behavior and Credit Reallocation?
Using Japanese firm data covering the Japanese financial crisis in the early 1990s, we find that exporters' domestic sales declined more significantly than their foreign sales, which in turn declined more significantly than non-exporters' sales. This stylized fact provides a new litmus test for different theories proposed in the literature to explain a trade collapse associated with a financial crisis. In this paper we embed the Melitz's (2003) model into a tractable DSGE framework with incomplete financial markets and endogenous credit allocation to explain both the Japanese firm-level data ...
Working Paper
Automation, Market Concentration, and the Labor Share
Since the early 2000s, a rising share of production has been concentrated in a small number of superstar firms. We argue that the rise of automation technologies and the cross-sectional variation of robot use rates have contributed to the increases in industrial concentration. Motivated by empirical evidence, we build a general equilibrium model with heterogeneous firms, endogenous automation decisions, and variable markups. Firms choose between two types of technologies, one uses workers only and the other uses both workers and robots subject to an idiosyncratic fixed cost of robot ...
Working Paper
Liquidity Premia, Price-Rent Dynamics, and Business Cycles
n the U.S. economy during the past 25 years, house prices exhibit fluctuations considerably larger than house rents, and these large fluctuations tend to move together with business cycles. We build a simple theoretical model to characterize these observations by showing the tight connection between price-rent fluctuation and the liquidity constraint faced by productive firms. After developing economic intuition for this result, we estimate a medium-scale dynamic general equilibrium model to assess the empirical importance of the role the price-rent fluctuation plays in the business cycle. ...
Working Paper
Offshore Production and Business Cycle Dynamics with Heterogeneous Firms
To examine the effect of offshoring through vertical FDI on the international transmission of business cycles, I propose a two-country model in which firms endogenously choose the location of their production plants over the business cycle. Firms face a sunk cost to enter the domestic market and an additional fixed cost to produce offshore. As such, the offshoring decision depends on the firm-specific productivity and on fluctuations in the relative cost of effective labor. The model generates a procyclical pattern of offshoring and dynamics along its extensive margin that are consistent with ...