Research

Abstract: We study the implications of firm heterogeneity for business cycle dynamics and monetary policy. Firms differ in their exposure to aggregate risk, which leads to dispersion in costs of capital that influence micro-level resource allocations. The heterogeneous firm economy can be recast as a representative firm New Keynesian model, but where total factor productivity (TFP) endogenously depends on the micro-allocation. The monetary policy regime determines the nature of aggregate risk and hence shapes the allocation and long-run level/dynamics of TFP. Welfare losses from policies ignoring heterogeneity can be substantial, which stem largely from a less productive allocation of resources.

Abstract: How does increasing international financial diversification affect firm-level and aggregate labor shares? We answer this question using a novel framework of firm labor choice under uncertainty. The theory predicts that international risk sharing leads to a reallocation of labor towards riskier/low labor share firms and a rise in the median (or within-firm) labor share, matching key micro-level facts. We use firm-level and cross-country data to document a number of empirical patterns consistent with the theory, namely: (i) riskier firms have lower labor shares, (ii) international diversification is associated with reallocation towards risky firms and declines in the aggregate labor share, and (iii) industries with greater heterogeneity have higher sensitivity of their labor share to international diversification.

A few sufficient statistics can identify the aggregate consequences of distortions to firm investment, such as from agency or external financing frictions, in a class of general equilibrium models that can accommodate rich general equilibrium effects such as endogenous firm entry. This result does not depend on the microfoundation of the distortion; one can generate inferences about aggregate effects that apply for multiple microfoundations or in cases where the microeconomic dynamics are intractable and a fully specified model is difficult or impossible to solve. To demonstrate the relevance of the methodology, we use it to quantify the aggregate consequences of costly external equity financing and a manager-shareholder friction, relying on estimates from the corporate finance literature to identify the sufficient statistics.  The easy-to-implement approach demonstrates the contrast between partial and general equilibrium findings, and how labor supply elasticities, complementarities in production, and firm entry interact with the different firm-level distortions.

(Online appendix)

Abstract: A number of recent papers use the interaction of firm idiosyncratic volatility shocks with firm financial frictions to explain business cycle dynamics during the 2007-2009 recession. I argue that a key parameter for these models is the cost of default, as it has a quantitatively first-order effect on the magnitude of the decline in employment and other aggregates in response to idiosyncratic volatility shocks. I use firm-level cross-sectional data and a structural model of financial frictions and volatility shocks to assess the role of volatility shocks and the cost of default on firm and aggregate employment over the business cycle. I find that when the cost of default is calibrated to the range of estimates coming from the corporate finance literature, the model reproduces key cross-sectional moments of equity volatility, bond spreads, and employment growth. However, this calibration implies aggregate employment losses driven by shocks to firm idiosyncratic volatility are modest. I propose two additional shocks calibrated using firm-level panel data which could amplify the decline in employment in the context of such a model. First, the decline in employment is amplified when the increase in firm idiosyncratic risk is modeled not only as a positive second moment shock but also a negative third moment shock. Second, a plausible increase in the cost of default over the business cycle can interact with volatility shocks to dramatically reduce aggregate employment.

Abstract: What are the gains from resolving debt overhang for firm growth and aggregate productivity?  This paper addresses this question through the lens of a general equilibrium model of firm dynamics and endogenous innovation in which debt overhang affects the firm innovation decision and, thus, firm expected subsequent growth.  The estimated model implies that while the private gains to a firm from resolving debt overhang can be large if it faces sufficient default risk, the expected gains to firms on average are relatively modest. The social gains to long-run productivity and output from resolving debt overhang are smaller, as changes in prices and the aggregate bankruptcy rate act as dampening forces.  However, the estimated model suggests the gains from resolving debt overhang over the business cycle can be large, as firm default risk rises significantly during the recession, which implies a significant decrease in firm innovation and subsequent firm growth.

+Online Appendix

Abstract: We develop a theory linking “misallocation,” i.e., dispersion in marginal products of capital (MPK), to macroeconomic risk. Dispersion in MPK depends on (i) heterogeneity in firm-level risk and (ii) the magnitude of risk premia. We document strong empirical support for these predictions. Stock market-based measures of risk premia imply that risk considerations explain about 25% of MPK dispersion among US firms and rationalize a large persistent component in firm-level MPK, suggesting that much of the observed dispersion may stem from efficient sources. Time-varying risk premia lead to countercyclical MPK dispersion alongside procyclical capital reallocation. Risk-based MPK dispersion, though possibly efficient: (i) amplifies the effects of exogenous shocks on aggregate total factor productivity (TFP), (ii) induces negative skewness in TFP, i.e., downturns that are sharper than expansions and (iii) reduces long-run TFP by as much as 5%, suggesting large “productivity costs” of business cycles. (Online appendix, Codes)

(formerly circulated as "Risk-Adjusted Capital Allocation, Misallocation, and Aggregate TFP")

Abstract: In U.S. firm-level data, large firms increase their spending on customer capital significantly more than small firms following an interest rate decline.  We interpret this evidence in a model with product market frictions where heterogeneous firms strategically advertise to build a customer base.  When a firm advertises, it shifts customers’ demand away from competitors.  This externality is especially severe when firms have a sizable existing customer base, discouraging smaller competitors and making them less responsive to interest rate shocks.   The model provides a rationale for the rise in market concentration and market power in recent decades, while interest rates fell.

Abstract: Central bank large-scale asset purchases, particularly the purchase of corporate bonds of nonfinancial firms, can induce a misallocation of resources through their heterogeneous effect on firms’ cost of capital. First, we analytically demonstrate the mechanism in a static model with heterogeneous agents. We then evaluate the misallocation of resources induced by corporate bond buys and the associated output losses in a calibrated New Keynesian DSGE model with heterogeneous firms. The calibrated model suggests misallocation effects from corporate bond buys can be large enough to make corporate bond buys less effective than government bond buys, which is not the case without accounting for misallocation effects.  (Codes) 

Abstract: This paper presents accounting decompositions of changes in aggregate labor and capital productivity. Our simplest decomposition breaks changes in an aggregate productivity ratio into two components: A mean component, which captures common changes to firm factor productivity ratios, and a dispersion component, which captures changes in the variance and higher order moments of their distribution. In standard models with heterogeneous firms and frictions to firm input decisions, the dispersion component is a function of changes in the second and higher moments of the log of marginal revenue factor productivities and reflects changes in the extent of distortions to firm factor input allocations across firms. We apply our decomposition to public firm data from the United States and Japan. We find that the mean component is responsible for most of the variation in aggregate productivity over the business cycle, while the dispersion component plays a modest role.