Research

Working Papers

Trade Credit in a Developing Country  (with Mauro Cazzaniga and Leonardo Alencar)

Trade credit can be a substitute for bank credit when firms have limited access to financial institutions. This is particularly relevant in developing countries where bank interest rates are highly dispersed and smaller firms face a prohibitive cost of bank credit. This paper builds a production network model where each pair of sellers and buyers choose intermediate inputs' quantities, prices, and levels of trade credit in a decentralized fashion, given heterogeneous bank interest rates. The dispersion in interest rates is explained by both heterogeneous risk of firms' default and additional heterogeneous costs, labeled as 'frictions.' In equilibrium, suppliers paying low bank interest rates are net providers of trade credit to clients paying high interest rates when this spread is due to frictions. We calibrate the model using balance sheet data, firm-to-firm transaction data, and bank-to-firm credit data for the Brazilian economy. We decompose the observed interest rates between the risk and the frictional components. Trade credit attenuates shocks to financial frictions hitting downstream firms, while it amplifies these shocks when they hit upstream companies. Trade credit also amplifies interest rate shocks due to a higher risk of default. We also use our model to evaluate the importance of trade credit for aggregate output, given the evolution of firm-level interest rates over the last four years. The endogenous adjustment in trade credit levels had a positive impact on output from 2022 when the dispersion of interest rates increased.

Credit Bubbles and Misallocation (NEW VERSION)

(Bank of Canada Graduate Student Paper Award, 2017)

In recent decades, the macroeconomy of many advanced economies has been characterized by: 1) low real interest rates; 2) low productivity growth; and 3) a rise of zombie firms  –  firms whose profits persistently fall below interest payments. This paper shows that credit supply plays a role in the rise of zombie firms and proposes a theory of credit bubbles that fits the evidence. We use industry-country level data for a sample of European countries during the 2010-2018 period and build a shift-share IV based on international investment portfolios. The analysis reveals that a greater supply of credit was allocated in favor of zombie firms, did not reduce the average corporate interest rate and worsened aggregate productivity. These patterns can be explained in an open economy model of credit bubbles. When the international interest rate R is greater than the growth rate of the economy g, unprofitable companies would optimally default and exit the market. However, if R is less than g, low-productivity companies might issue bubbly credit and refinance their debt even after a permanent negative shock. An increase in bubbly credit supply extends the life of unprofitable firms and reduces aggregate productivity by relocating factors to lower productivity firms.

Bank Dividends and Deposit Rents, Revise & Resubmit at Journal of Empirical Finance

This paper documents that dividend payouts of larger U.S. banks and financial companies have been positively correlated with interest payments over the last decades. This contrasts with industrial companies and smaller banks who reduce their dividends when the debt burden is higher. These diverging patterns are confirmed both across years and across firms and controlling for revenues and asset values. Therefore, they are not simply driven by greater bank profitability when interest rates are higher. We show that this payout behavior is associated with the presence of market power in deposit markets.

Publications

Short-covering bubbles (with Bernardo Guimaraes), Forthcoming at Journal of Economic Theory (2024)

This paper argues that allowing for short selling might give rise to bubbles that would otherwise not exist. An asset with zero fundamental value might be traded at a positive price by rational agents. We call it a short-covering bubble because it is sustained by short-sellers covering their positions. Agents trade according to their beliefs on how long the bubble will persist. In an extension with behavioral trades that gives rise to a speculative bubble, short-selling might have an ambiguous effect on the asset price.

Entrepreneurship and Misallocation in Production Network Economies (with Tiago Cavalcanti and Angelo Mendes), Forthcoming at Economic Theory (2023)

This paper explores how sectoral linkages amplify or mitigate misallocation at intensive and extensive margins. Our analysis employs a multisector general equilibrium model with input-output connections, heterogeneous agents, and endogenous occupational choices. Distortions impact both the intensive use of production inputs and agents' career decisions, causing misallocation of entrepreneurs across diverse production sectors. We analytically demonstrate that input-output linkages amplify (diminish) misallocation losses when the most distorted sectors are upstream (downstream). Calibrating our model to the US economy, we quantify output losses due to sectoral corporate taxes, revealing that sectoral linkages magnify misallocation losses by over four times. We evaluate an entry subsidy program and find that it should ideally target sectors where "marginal" entrepreneurs face more significant profit losses due to distortions, even if these sectors are not the most distorted ones.

The Housing Boom and Selection into Entrepreneurship (with João Galindo da Fonseca), Labour Economics (2023)

Existing evidence shows that increases in property prices produce immediate positive effects on economic activity and, particularly, on business creation. In this paper, we ask the following question: how does a housing boom alter the selection of individuals that open a firm? The answer to this question is important to understand how robust and long-lasting is the positive effect of a housing shock. We find that the early 2000 US housing boom increased entry into entrepreneurship mostly for lower ability house-owners. We derive our results using IQ scores and an indirect measure of ability constructed from individuals’ wage history.