Research

My research explores the impact of limited liability on resource allocation in a connected economic system. Limited liability allows companies to walk away from obligations if losses surpass a certain limit. In the finance literature, limited liability is associated with over-accumulation of resources and debt in a partial equilibrium with isolated sectors. I extend this analysis to a general equilibrium model where sectors are interlinked, trading intermediate inputs on credit. In this setting, limited liability triggers a chain effect, leading to over-demand for intermediate inputs (as a resource), reducing final goods production, and ultimately diminishing overall Total Factor Productivity. 

For a simplified example, consider a single-sector economy where firms buy gross output(Y) as intermediate inputs(X): limited liability compels the economy to allocate more resources to intermediate inputs, leaving less for final consumer goods(C), thereby illustrating the newfound misallocation mechanism. Limited liability endogenously increases Γ from one, and the final output reduces even though gross output increases.

We offer the first non-linear analysis of how microeconomic disruptions in an inefficient production network economy impact aggregate TFP. Our decompositions, applicable to any general equilibrium economy, provide non-parametric insights. We identify essential general equilibrium metrics for capturing the non-linear repercussions of microeconomic fluctuations through network connections. Our findings encompass firm-level productivity shocks, wasted distortions, and rebated distortions. We reveal that substantial shocks or high production process complementarity/substitution introduce substantial bias in the linear approximation of distortions and productivity shocks found in the literature. Our non-linear second-order effects substantially mitigate this bias. 

This study focuses on the bond market as a significant source of external funding for U.S. firms. It examines the observed increase in credit risk premiums since the mid-1990s, despite individual risk factors suggesting a declining trend. The research investigates the dynamics of firms' behavior toward their suppliers and customers, considering how firms' interactions may contribute to the rise in credit risk. Using comprehensive data sets, including Compustat and FactSet, which focus on consumer segments, I find that U.S. firms have changed their interactions over time, leading to a less diversified customer and supplier portfolio.

To delve deeper into this phenomenon, I develop an exogenous multi-sector model where firms engage in trading intermediate inputs, borrow funds from representative households, and make endogenous decisions about default. The model demonstrates how individual risk factors of suppliers influence a firm's default decision, with the probability of default, π, depending on the supplier's performance. Additionally, I explore the impact of firms' connection structures on the probability of default in the presence of sectoral shocks. Suppliers' decisions to default influence customer default thresholds. Structural changes in the U.S. production network indicate an increased sensitivity of customers' default thresholds to suppliers' decisions.

Empirical analysis linking the model to real-world data reveals that firms' connections with others can account for part of the cross-sectional variation in sectoral credit spreads and most of the overall credit spread trend.

Eliminating in-person schooling reduces the amount of time parents of school-aged children have available to work and therefore reduces income to those workers and the economy as a whole. We discuss two measures of economic importance and how they can be modifi ed to better refl ect the vital role played by K–12 education. The first is its size, as captured by the fraction of gross domestic product produced by that sector. The second is its centrality reflecting how essential the sector is to the network of economic activity. Using data from Canada’s Census of Population and Symmetric Input–Output Tables, we show how accounting for this role dramatically increases the importance of K–12 schooling.

To what extent can a short-term decline in the output of a small open economy be explained by trade barriers? To answer this, we extend the Business Cycle Accounting method of Chari et al. (2007) to a small open economy model. We include an additional time-varying wedge to model financial trade frictions caused by barriers on imports. International sanctions on Iran provide an empirical opportunity to apply this method to data on Iran’s recession in 2012-13. The results indicate that efficiency and investment wedges account for most of the fluctuations in aggregate variables during the sanctions, and trade barriers had little contemporaneous explanatory power. The effect of oil boycotts remains unknown.