We study distortions to firm production along the intensive margin---how much to produce at each establishment---and the extensive margin---how many establishments to open. Using data on the universe of Swedish establishments in services industries, we show that 1) size-dependent firm markups are just a symptom of size-dependent establishment markups, i.e., firms with larger establishments set higher markups but firms with more establishments do not, and 2) each successive establishment at a firm tends to be smaller relative to its municipality-industry. In a model of competition between firms through establishments, we characterize the distortions implied by size-dependent establishment markups: firms inefficiently undervalue 1) production at larger establishments, 2) opening larger establishments, and 3) production at existing establishments relative to opening new establishments. Calibrating to our Swedish data, we find that firms' extensive margin decisions are responsible for only 9% of the losses implied by these distortions. Nonetheless, firms' extensive margin decisions are crucial for the design of optimal firm size-dependent policy and sharply limit its effectiveness. This is because the gains from shifting sales toward large firms are much lower once we take their extensive margin response---opening too many establishments---into account.
Resubmited to Review of Economic Studies
We study heterogeneity in the response of firm investment to monetary policy. We estimate firm-specific capital semi-elasticities to plausibly exogenous changes in interest rates in a comprehensive data set that covers ten euro area countries. Using a machine learning algorithm, we find that firm age best predicts differences in these semi-elasticities across firms. Based on this result, we estimate age-specific capital semi-elasticities. Investments of young firms are significantly more sensitive to monetary policy than investments of older firms. We rationalize this finding in a lifecycle firm model with convex and fixed capital adjustment costs. A key implication is that monetary policy is less potent in an economy with older firms.
Resubmitted to Journal of Monetary Economics
Video (begins at 9:28) of Neil Wallace discussing the paper at a conference at the Federal Reserve Bank of Minneapolis and the University of Minnesota
We introduce a new mechanism that eliminates self-fulfilling runs on a Diamond Dybvig intermediary without requiring deposit insurance. During a run, a depositor can take unliquidated intermediary assets in exchange for closing their account. We show our mechanism would have been useful in the most recent banking crisis. We also show our mechanism improves upon suspension if policy makers have limited commitment, depositors repeatedly interact with the intermediary, and/or there is aggregate return risk.
A previous version of this paper was circulated under the title "Market Concentration, Growth, and Acquisitions".
I study the implications of large firm innovation for aggregate growth. To do so, I develop an oligopolistic endogenous growth model in which firms choose how much to innovate, as well as the degree to which their innovation targets their competitors through creative destruction. Larger firms disproportionately innovate through creative destruction---relative to the smaller size of their competitors---in order to avoid cannibalization. As a result, in the calibrated model, an increase in large firm innovation incentives explains a substantial portion of the recent growth slowdown in the US. Moreover, a tax on large firm innovation improves welfare. Finally, a tax on large firm acquisitions of smaller competitors can reduce welfare by encouraging large firms to innovate rather than acquire.
I propose a new theory to explain the recent rise in industry-level concentration and markups. I study a dynamic model of oligopolistic competition in which firms make a one-time, irreversible investment in intangible capital at entry. This effectively allows firms to commit to a higher level of production, which deters competitors and potential entrants. I take as given a change in technology that increases the importance of intangible capital in production. Large productive firms with high markups disproportionately increase investment and gain market share. In the calibrated model, a shift toward intangible capital in line with estimates of the recent rise in intangibles can explain more than half the increases in concentration and markups from 1997 to 2012. The model also quantitatively matches the observed increase in labor productivity and fall in the labor share in concentrating industries. Finally, I show that in the model, these changes result in an increase in welfare equivalent to a 0.72% permanent increase in consumption. High markups are inefficient in the model because they imply that large firms are underproducing. Intangible capital allows large firms to commit to a higher level of production, undoing part of this inefficiency.
We introduce a framework to study targeted policy interventions. Agents differ both in their likelihood of and payoff from interaction, exert externalities through interaction, and can alter their interaction rates at a cost. A policy maker selects a subset of agents to alter their interaction rates at no cost (a selection policy). We fully characterize both the second- and first-best selection policies; that is, when costly interaction choices are either voluntary or mandatory. Our main result introduces the concept of normative risk compensation, which describes how the second-best selection policy internalizes spillovers to a lesser (greater) extent than the firstbest when externalities are negative (positive), in order to manipulate voluntary incentives. We apply our results to various settings including vaccine allocation and information aggregation.
This paper builds on previous work on the optimal allocation of vaccines: Optimal Vaccine Policies: Spillovers and Incentives, with Nikhil Vellodi (Covid Economics: Vetted and Real-Time Papers, Issue 65)