Research
Risky Business: The Choice of Entrepreneurial Risk under Incomplete Markets
This paper studies how the uninsurable nature of entrepreneurial risk reduces entrepreneurial activity and affects aggregate output, productivity, and the distribution of wealth. I model the occupational choice of individuals who can choose to become workers or entrepreneurs. Individuals that choose to be entrepreneurs also choose how risky a business to start, with higher-risk businesses leading to higher expected productivity. My model features two distinct financial frictions. First, a missing market for entrepreneurial risk prevents entrepreneurs from insuring themselves against their income risk and the risk of business failure. Second, borrowing constraints limit the size of an entrepreneur's business. I contribute to a literature on financial frictions and entrepreneurship by studying the missing market for entrepreneurial risk and contrasting its effects with borrowing constraints, which have been extensively studied. I calibrate the strength of these two financial frictions using micro data on new U.S. firms from the Kauffman Firm Survey. I find that completing the missing market for entrepreneurial risk improves aggregate output by 7.7%, which is more than twice the 2.9% increase that results from relaxing the borrowing constraints. I also find that completing the missing market for entrepreneurial risk reduces the share of wealth held by the wealthiest 1% by more than half. In a policy experiment, I show that a partial insurance scheme for unsuccessful entrepreneurs can increase aggregate productivity and output by encouraging entrepreneurs to start riskier businesses.
Publicly-Listed Firms, Capital Misallocation, and Cross-Country Productivity
with Stephen Ayerst
We study how differences between publicly-listed and privately-owned firms contribute to aggregate productivity. Using European firm-level data, we document that publicly-listed firms are larger and more productive than private firms. We show that firms substantially increase assets and employment around the time of their initial public offering (IPO). In order to quantify the aggregate importance of these differences and growth, we build a firm dynamics model, where both public and private firms make investments to improve productivity. Private firms endogenously choose to conduct IPOs, which transforms the firm into a public firm. Public firms face lower capital costs and capital costs scale less with productivity, incentivizing investment. We find that the existence of public equity markets boosts GDP by 0.5% in Italy and by 6.0% in France. Differences in the institutions of public equity markets explain between one-half and three-quarters of the France-Italy productivity gap. We also use the quantitative model to measure the productivity losses due to differences in capital costs between public and private firms, and study a policy experiment where the government subsidizes IPO costs to boost aggregate productivity.
The Composition and Distribution of Wealth and Aggregate Consumption Dynamics
with Bulent Guler and Burhan Kuruscu
We study how the composition and distribution of household wealth affects the average marginal propensity to consume (MPC) and the distribution of MPC's. We document several facts in the Survey of Consumer Finances about the composition of household portfolios between housing, mortgage debt, and liquid financial assets. We then build a rich quantitative lifecycle model with heterogeneous returns that matches both the composition and concentration of wealth as well as key aggregate facts about housing and mortgage markets in the US. We use the model to decompose the importance of return heterogeneity, long-term fixed rate mortgages and refinancing, as well as owner-occupied housing on the average MPC. The decomposition exercise shows that return heterogeneity is the most important factor in generating a high average MPC. Illiquid owner-occupied housing also plays a substantial role, while the presence of illiquid mortgage debt reduces the average MPC, as it allows households to borrow against their illiquid assets. We use our model to compare the aggregate and distributional effects of a one-time stimulus payment to the effects of a mortgage debt relief program. We show that mortgage debt relief that targets high loan-to-value households is both less effective at boosting aggregate consumption and more regressive than equal stimulus payments to all households, and that a careful consideration of household’s portfolios is vital for policy analysis..
Computing Longitudinal Moments for Heterogeneous Agent Models
with Sergio Ocampo Díaz
Published: Computational Economics
Computing population moments for heterogeneous agent models is a necessary step for their estimation and evaluation. Computation based on Monte Carlo methods is usually time- and resource-consuming because it involves simulating a large sample of agents and potentially tracking them over time. We argue in favor of an alternative method for computing both cross-sectional and longitudinal moments that exploits the endogenous Markov transition function that defines the stationary distribution of agents in the model. The method relies on following the distribution of populations of interest by iterating forward the Markov transition function rather than focusing on a simulated sample of agents. Approximations of this function are readily available from standard solution methods of dynamic programming problems. The method provides precise estimates of moments like top-wealth shares, auto-correlations, transition rates, or age-profiles, at lower time- and resource-costs compared to Monte Carlo based methods.
Income Dynamics Before, During, and After Entrepreneurship: Evidence and Theory
with Mahmood Haddara, Gueorgui Kambourov, and Burhan Kuruscu
We study the income dynamics of entrepreneurs using the Canadian Employer-Employee Dynamics Database. This linked employer-employee administrative data allows us to observe both the employment and entrepreneurial incomes of individuals before they start a business, while running their business, and, if they exit, after shutting down a business. Based on prior labour market or entrepreneurial experience, we analyze the patterns of selection into entrepreneurship and how total earnings initially change as individuals start new businesses. As these businesses grow, we document the correlation between entrepreneurial income growth and firm growth in assets, profits, and employment. For unsuccessful entrepreneurs, we compare the characteristics of those that return to the labour market with those that start subsequent businesses and measure how earnings after shutting down the business compare to earnings prior to starting the business. Lastly, we estimate a joint process for entrepreneurial and labour market ability. Informed by these facts, we build a life-cycle model of occupational choice. The model allows us to quantify the role of labour market experience and entrepreneurial experience in the success of new businesses. Finally, we evaluate the efficacy of government policy designed to encourage entrepreneurship, such as loan programs and the differential tax treatment of business income.