Research
Factor Misallocation and High-Growth Firms in Spain
Working Paper, March 2023
Abstract: The Spanish economy has recently experienced a poor aggregate performance accompanied by the prevalence of low-growth, small firms. This paper relates these facts to the phenomenon of high-growth-potential firms. I study whether young firms are deterred from growing by financial frictions, and its macroeconomic implications. Using financial information of companies, I find that firms are heterogeneous in expected growth rates in Spain. Additionally, dynamic life-cycle moments are informative about frictions affecting young firms. I develop a firm-dynamics general equilibrium model considering a firm-level productivity process and frictions. I calibrate two alternative models, with and without expected-growth-rate heterogeneity, to match data on input life-cycle allocations. In the model with heterogeneous expected growth, high-growth-potential firms are prevented from growing by financial frictions, and eliminating borrowing constraints generates large aggregate gains. In the model without this source of heterogeneity, there are less high-growing firms and aggregate effects from removing financial frictions are smaller.
Venture Capital Investments and Learning over the Firm Life Cycle
Working Paper, June 2024 (submitted)
Abstract: The life cycle of young, high-risk entrepreneurial projects and the financing of innovation has become increasingly important for economists, companies and policy-makers. Motivated by empirical facts of venture-backed firms in the United States on dynamic investment choices and sale and liquidation decisions, this paper studies the behaviour of young, high-risk firms. In particular, I assess whether their ability to learn about their unknown quality as they age is capable of rationalising documented firm-level facts. I develop a model of the firm allowing for uncertainty about firm outcomes and investment and exit decisions over life. In the model, the capability of receiving cash-flows that are informative about unknown firm quality delays liquidations and makes fund injections contingent on cash-flows, as in real-life investments. In the numerical solution of the model, learning provides incentives for owners to delay terminations and sales and to perform contingent investments in the meanwhile. More informative cash-flows induce firm owners to keep their projects for more periods and rises the number of eventual sales. For this reason, a higher learning ability increases firm value, particularly for more risky projects.