Research
Publication
Aggregate Consequences of Credit Subsidy Policies: Firm Dynamics and Misallocation
with Tatsuro Senga, Review of Economic Dynamics, Apr. 2019 (Paper) (Appendix)
Government policies that attempt to alleviate credit constraints faced by small and young firms are widely adopted across countries. We study the aggregate impact of such targeted credit subsidies in a heterogeneous firm model with collateral constraints and endogenous entry and exit. A defining feature of our model is a non-Gaussian process of firm-level productivity, which allows us to capture the skewed firm size distribution seen in the Business Dynamics Statistics (BDS). We compare the welfare and aggregate productivity implications of our non-Gaussian process to those of a standard AR(1) process. While credit subsidies resolve misallocation of resources and enhance aggregate productivity, increased factor prices, in equilibrium, reduce the number of firms in production, which in turn depresses aggregate productivity. We show that the latter indirect general equilibrium effects dominate the former direct productivity gains in a model with the standard AR(1) process, as compared to our non-Gaussian process, under which both welfare and aggregate productivity increase by subsidy policies.
Working Paper
Firm Size and Business Cycles with Credit Shocks
Conditionally accepted at International Economic Review, Nov. 2023 (Paper)
I study the macroeconomic implications of firm heterogeneity in the presence of financial frictions. I build a business cycle model in which firm size is jointly determined by idiosyncratic productivity and collateral constraints. I estimate skewed idiosyncratic shocks and align the model with the empirical evidence on firm size, leverage, and investment moments. The extent of resource misallocation is driven by a small number of highly productive firms that are prevented from becoming very large. A credit shock severely affects such firms, further constraining their ability to borrow. This generates a large and persistent economic downturn that is comparable to the Great Recession.
Firm Debt and Default over the Pandemic and Recovery
with Aubhik Khan, Tatsuro Senga, and Julia Thomas, Oct. 2023 (Paper)
We study the effects of a pandemic in an economy where firms differ in their productivity, capital, and debt. Firms, facing idiosyncratic shocks, finance investment using noncontingent debt and their default risk rises with leverage. Households share consumption risk given differences in their health and employment status. Healthy individuals may work but experience a higher risk of infection which increases with the number of ill individuals.
We show that a pandemic generates persistent aggregate dynamics. First, taking into account the distribution of health in the future, households reduce labor supply in an effort to restrain contagion. Decreases in consumption and employment in turn negatively affect firms’ earnings in equilibrium. Highly leveraged borrowers become more likely to default, exit rises, and the number of producers falls. Continuing firms with lower earnings find it harder to finance investment, raising the dispersion of resources. Aggregate productivity falls endogenously. The interaction between households and firms propagates the impact of the pandemic through changes in their distributions.
We find that the recovery from a large shock that decreases household employment can be gradual and prolonged. As the pandemic ends, entry rises and the number of firms begins to return to its long-run level. However, entrants’ growth is restricted by the loan rates associated with high leverage and their level of capital, relative to productivity. This implies that a pandemic is followed by a slow economic recovery characterized by a gradual improvement in aggregate productivity.
Production Heterogeneity with Borrowing Constraint and Working Capital
Feb. 2017 (Paper)
Weak recovery in the U.S. labor market following the recent recession is often associated with persistent increases in the aggregate labor wedge. To investigate this issue, I study an equilibrium model of production heterogeneity where firms face shocks to aggregate and idiosyncratic productivity. In the model economy, external financing of a firm is limited by a collateralized borrowing constraint as well as a working capital requirement; the availability of credit is affected by the firm's choice of employment. In response, some firms choose lower levels of employment than the static optimum in order to increase their available credit. This distortion in firm-level labor demand generates a rise in the aggregate labor wedge following a tightening of the borrowing constraint in the economy. I show that a credit tightening is associated with the slow recovery of aggregate employment. This result is closely related to the reallocation of factors of production across firms. It follows that a substantial increase in labor misallocation is exacerbating the recession and delaying the aggregate recovery.
Work in Progress
Idiosyncratic Risk, Long-term Debt, and Aggregate Productivity
with Aubhik Khan and Soyoung Lee
Intangible Assets and Inter-firm Linkages over the Lifecycle of Firms: Theory and Firm-level Evidence
with Yukiko Saito and Tatsuro Senga (Slides)