Research

Business Relationships, Trade Credit, and Idiosyncratic Shocks

This paper presents a model of the joint determination of trade credit and business relationships and shows how they responded to the supply-chain disruptions in the Covid-19 pandemic. In a frictional, decentralized market for inputs, final-good retailers and input suppliers form durable business relationships, which support endogenous trade credit through punishment. Retailers who default lose access to inputs and forego production while searching for a new match. Using corporate 10-K disclosures of business relationships, along with financial data from Compustat, the model is calibrated to match 2019 data on trade credit and matching: trade credit finances between 50% and 66% of business-to-business sales and matching rates are 34% annually. In 2020 and 2021, business relationships were destroyed at 13% and 21% higher rates than the ten-year average. As a result of elevated relationship risk, model-predicted business-to-business sales decline 37% and output declines 25% in 2020. Had trade credit not declined, counterfactual business-to-business sales and output would have only fallen 16.5% and 9.7%, respectively. In total, the tightening of trade credit for 10-K firms cost $142b in business-to-business sales and $252b in output (1.2% of U.S. GDP in 2020).

Latest Version: November 3, 2023

Collateral Expansion: Pricing Spillovers from Financial Innovation                       with Ana Fostel and Mrithyunjayan Nilayamgode

Financial innovation is the use of new kinds of collateral or new kinds of promises backed by existing collateral. We study the effect of collateral-based financial innovation in a general equilibrium model with incomplete markets and provide precise predictions about cross-price spillovers. Whereas leverage has positive price spillovers on other markets, tranching and credit default swaps have negative price spillovers on other asset markets. Our results underscore a new mechanism (collateral-based financial innovation) that can explain cross-market spillovers without relying on traditional contagion (portfolio/fire-sale) channels.

Managing DC Accounts after Retirement: Evidence from Portfolio Data               with Quinn Curtis and Leora Friedberg

We present four facts describing how retirees manage their retirement savings in defined contribution plans, using ten years of portfolio data from a large, public university. First, about one-third of retirees (aged 62+) exit the savings plan within four months of retirement and one-half within twelve months. Second, retirees do not actively manage their funds, mostly favoring a ``set-and-forget" approach. Third, the prevalence of target-date funds, which automatically create and adjust portfolios of equity and fixed income investments, has increased among retirees. By the end of the panel, nearly 40% retirees have their entire portfolio invested in a target-date fund. Fourth, retirees are highly invested in equities: portfolio equity exposure averaged 75% and portfolio beta, computed against S&P500 returns, averaged  0.68. Both numbers are above traditional benchmarks; at no age in our sample does average equity exposure fall below 50%.