Research
Working Papers
Upwardly Mobile: The Response of Young vs. Old Firms to Monetary Policy, with Per Krusell and Claire Thürwächter (October 2023)
Under revision for 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. Older firms are less responsive because they are closer to their optimal scale, and thus less likely to pay the fixed cost. A key implication is that monetary policy is less potent in an economy with older firms.
Under revision for 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.
I develop an oligopolistic growth model in which a firm chooses how much to innovate, as well as the degree to which its innovation is directed toward its competitors’ goods through creative destruction. I find that a firm's size shapes the direction of its innovation: larger firms generate less growth relative to the rate at which they creatively destroy their competitors' goods. I demonstrate positive and normative implications of this mechanism. First, an increase in large firm innovation incentives can explain a substantial portion of the recent growth slowdown in the US. Second, it is optimal to tax large firm revenues because the direction of innovation is more significant than other size-related distortions. Third, a tax on large firm acquisitions of smaller competitors' goods can reduce welfare by encouraging large firms to innovate rather than acquire. Fourth, it is advantageous to be large.
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)