Whom to insure - firms or workers? (Job Market Paper)

This paper proposes an alternative way to provide insurance to workers in the labor market through Firm Transfers (FT), a payment given to businesses to prevent layoffs. I develop a frictional model of the labor market where firms make endogenous layoff decisions in the presence of idiosyncratic productivity shocks and workers face uninsurable income risk. FT prevent firm-initiated inefficient layoffs due to rigidity in wage contract and provide insurance against job loss. FT improve human capital accumulation by reducing job loss scarring, but at the cost of reducing productivity and potentially suppressing output. The Paycheck Protection Program validates the model by matching the measured employment gains in the data along the transition path. Transfers that maximize social welfare are given to both firms and unemployed workers. I find the optimal policy mitigates the scarring effect of job loss by reducing consumption losses around job loss by 1.5% and increasing lifetime earnings of workers by 3.6%.

Unexpected corporate bond demand and the impact on firm acquisition activity with April Meehl

This paper analyzes the interaction between firms' corporate bond issuance and their acquisition decisions. We build a quantitative model of the acquisition market that features acquirers and targets, in which acquirers have access to costly external financing to fund acquisitions. Acquirers and targets randomly meet and optimally decide on merging. We find that the acquirer increases its capital investment and borrowing as the probability of matching with a target increases.  We then use the model to simulate both the macroeconomic shock from the Covid-19 pandemic and the Fed's resulting unexpected intervention in the corporate debt markets, the Corporate Credit Facilities (CCFs). The macroeconomic shock decreases the likelihood of acquisition as firms are more financially constrained and unable to afford the cost of the merger. The simulated CCFs however relax the borrowing constraint of acquirers in the downturn, making the cost of the acquisition less burdensome. We find that the CCF increases the likelihood of cash acquisitions, but only if the acquirer had a low level of cash at the start of the period. We then test our model prediction using a novel dataset of firm level financials, credit ratings, bond issuance, and acquisitions. Using a difference and difference approach, we find a similar effect in the data - that the CCF did not impact firm acquisition behavior as many firms had elevated levels of cash at the time of the CCF announcement. 

The importance of countercyclical income risk for the welfare costs of business cycles with J. Carter Braxton (preliminary draft available upon request)

Recent work has shown that recessions are characterized by more negatively skewed income shocks and greater earnings losses following job loss. We revisit the welfare implications of business cycles in light of these recent empirical findings. To answer this question we combine a Bewley-Huggett-Aiyagari style model of consumption and savings with a directed search labor market with aggregate productivity shocks. We show that the model is able to endogenously generate recessions that feature increases in the negative skewness of income changes during recessions as well as larger earnings losses upon job loss. Eliminating business cycles from our baseline model generates a welfare gain equivalent to 2.7% of lifetime consumption. In a nested version of the model which does not feature increasing negative skewness or larger earnings losses in recessions, we find substantially smaller welfare gains from eliminated business cycles.