Research

100-word Abstract: Debt relief policy usually targets firms by size, most commonly small firms. I study whether that is the best target of a fixed budget during a financial crisis in a DSGE model of heterogeneous firms, financial frictions, and aggregate uncertainty that reproduces key aspects of U.S. data, including the size and age-size distributions of firms. Optimal policy relieves debt where the excess return to capital investment is highest, cutting the output trough by 47 percent. Small size is a poor proxy for this; targeting young or medium-size firms improves welfare by 5.2 and 3.6 times that of small firms, respectively.

100-word Abstract: Since 1984, firm entry has declined faster than firm exit. There are potentially two competing effects on the severity of a recession: a missing generation effect, where fewer entrants decreases the mass of producers, and a selection effect, where entry costs raise the average entrant's productivity. I model two economies; one where the entry rate matches that of 1990, and another where entry costs rise to match the 2003 entry rate. Firms face adjustment, entry, and continuation costs, with idiosyncratic and aggregate risk. Results show the missing generation effect dominates and recessions are exacerbated with higher entry costs.