Research

Asset Bubbles and Product Market Competition [paper]

Theoretical Economics (2024)  19(1), 325–364

This paper studies the interplay between asset bubbles and product market competition. It offers two main insights. The first is that imperfect competition creates a wedge between interest rates and the marginal product of capital. This makes rational bubbles possible even when there is no overaccumulation of capital. The second is that, when providing a production subsidy, bubbles stimulate competition and reduce monopoly rents. I show that bubbles can destroy efficient investment and have ambiguous welfare consequences. However, when they stimulate competition, they can have crowding-in effects on capital.

The Real Side of Stock Market Exuberance: Bubbles, Output and Productivity at the Industry Level [paper]

Economica (2024)  91(361), 268-291

There has been a growing interest in the theory of rational bubbles. Recent theories predict that bubbles are expansionary, but differ in the underlying mechanisms. This paper provides empirical evidence that help us assess different theories, and documents four main findings: stock market overvaluation is associated with (i) faster output and input growth, (ii) declining TFP growth, (iii) a greater contribution of labor for output growth, with no change in the contribution of capital, (iv) an increase in the number of firms. Overall, these findings suggest that bubbly expansions are driven by increased factor accumulation (in particular labor), and not from higher productivity growth.

Firm Heterogeneity, Market Power and Macroeconomic Fragility (with Alessandro Ferrari)  [draft]

AEJ: Macroeconomics (Revise & Resubmit)

We investigate how firm heterogeneity and market power affect macroeconomic fragility, defined as the probability of long-lasting recessions. We propose a theory in which the positive interaction between firm entry, competition and factor supply can give rise to multiple steady-states. We show that when firm heterogeneity is large, even small temporary shocks can trigger firm exit and make the economy spiral in a competition-driven poverty trap. Calibrating our model to incorporate the well-documented trends in increasing firm heterogeneity we find that, relative to 2007, an economy with the 1985 level of firm heterogeneity is 5 to 9 times less likely to experience a very persistent recession. We use our framework to study the 2008-09 recession and show that the model can rationalize the persistent deviation of output and most macroeconomic aggregates from trend, including the behavior of net entry, markups and the labor share. Post-crisis cross-industry data corroborates our proposed mechanism. Firm subsidies can be powerful in preventing quasi-permanent recessions and can lead to a 21% increase in welfare.

Understanding the Recent Trends in Business Dynamism: Evidence from Spain (with Enrique Moral-Benito) [draft]

We study the evolution of business dynamism in Spain between 1995 and 2007. Consistent with the evidence for the US, we document a significant decline in the Spanish firm entry and exit rates over this period. We also show that, when compared to incumbents of the same industry, young firms have become relatively more productive. We develop a model featuring firm dynamics and financial frictions to show how an interest rate decline can generate these trends. We also argue that common explanations that have been proposed for the US - which relate the fall in the entry rate to demographic changes or increased entry barriers - are unlikely candidates for the Spanish experience.