Sovereign Risk and Economic Activity: The Role of Firm Entry and Exit ~ Accepted at JPE Macro
(with Gaston Chaumont and Givi Melkadze)
Abstract: We quantify the role of firm entry and exit in shaping the output costs of sovereign debt crises. Empirically, higher sovereign risk correlates with less firm entry and more exits. We find evidence of credit frictions explaining the sovereign risk-entry relationship and the sovereign risk-exit relationship for small firms. We develop a model with sovereign risk, financial frictions, and endogenous firm dynamics. Calibrated to the Portuguese debt crisis, the model predicts that sovereign risk largely explains the observed entry and exit dynamics. The extensive margin accounts for about 35-64% of the medium-run and most of the long-run persistent output fall.
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Presented at: RIDGE December Forum 2024, Emory University 2024, York University 2023, Kent Macro Workshop 2023, University of Rochester 2022, Wharton 2022, the Federal Reserve Bank of Atlanta, SEA 2021, MEA 2022, Midwest Macro 2022, NASMES 2022, SED 2022, EEA/ESEM 2022, Lisbon Macro Workshop 2022, LACEA/LAMES 2022, and AEA/ASSA 2023, Auburn University
Quantifying the Allocative Efficiency of Capital: The Role of Capital Utilization ~ Accepted at JME
(with Poorya Kabir and Eugene Tan)
Abstract: Higher dispersion of log average revenue product of capital (ARPK) is commonly associated with lower capital allocative efficiency. We show this is a result of the assumption that capital utilization is fixed. However, when capital utilization is endogenous, higher capital allocative efficiency is associated with lower dispersion of log average revenue product of capital services (log difference between revenue and utilized capital), not ARPK. Furthermore, contrary to the standard relationship, increases to capital allocative efficiency is associated with higher ARPK dispersion when such improvements arise from greater utilization flexibility. We provide evidence supporting the mechanism and demonstrate counterfactuals where allocative efficiency gains are accompanied by higher ARPK dispersion. Lastly, we apply our framework to study the impact of a capital market liberalization reform in India. We estimate the reform improved allocative efficiency by 0.04%, but counterfactual analysis neglecting the response of utilization would have concluded efficiency gains of 5.25%.
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Presented at: SED Winter Meetings 2024, UC Santa Cruz 2024, UC Santa Barbara 2024, University of North Carolina – Chapel Hill 2024, ASSA 2024, Queen’s University 2024, Western University 2024, Wharton 2023, Lisbon Macro Workshop 2023, Theories and Methods in Macroeconomics (T2M) 2023, National University of Singapore 2023, University of Toronto 2022
Entry Decision, the Option to Delay Entry, and Business Cycles ~ Accepted at RED
Abstract: This paper demonstrates that the option to delay entry plays a key role in shaping the business cycle behavior of new firms. Using a model calibrated to U.S. firm dynamics, I show that this timing option endogenously generates a countercyclical opportunity cost of entry: during recessions, elevated risk of failure increases the value of waiting, which raises the effective cost of entry. I provide empirical evidence consistent with firms strategically delaying entry in response to changing aggregate conditions. Quantitatively, this channel significantly amplifies firm selection at entry and nearly doubles the cyclical volatility of new firm creation. Overall, variation in the number and composition of entrants accounts for 18% of aggregate employment fluctuations—a contribution more than halved in a model without the option to delay. Ignoring this channel may also lead to misleading predictions about how new firm entry responds to policy interventions.
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Presented at: University of Bristol 2024, Boston University 2022, Wharton 2022, EEA-ESEM 2022, SED 2021, ES World Congress 2020, EEA 2019, EESWM 2019, Auburn University, I-85 Macroeconomics Conference 2019, Midwest Macro at Vanderbilt University 2019, EGSC at Washington University in St. Louis 2019, GCER Alumni Conference 2019, the Federal Reserve Bank of St. Louis, University of Virginia, Auburn University, 6th Lindau Meeting on Economic Sciences 2018
Entrepreneurship through Employee Mobility, Innovation, and Growth
(with Salomé Baslandze)
Updated version coming soon !
Abstract: Firm-level productivity differences are big and are largely ascribed to ex-ante heterogeneity in the entrepreneurs' growth potential at birth. Where do these ex-ante differences come from, and what can the policy do to encourage the entry of high-growth entrepreneurs? We study empirically and by means of a quantitative growth model the spinout firms - the firms founded by former employees of the incumbent firms. By focusing on innovating spinouts identified through inventor mobility in the patent data, we establish three core facts: (i) spinouts outperform regular entrants over their lifecycle; (ii) firms with greater technological lead generate more successful spinouts; and (iii) parent firms experience a persistent decline in innovation following spinout events. Motivated by these findings, we develop a structural model of innovation and firm dynamics in which heterogeneous spinouts endogenously emerge from employee decisions. Spinouts influence growth through four channels: direct entry, incumbent disincentives, knowledge diffusion, and firm composition. Growth decompositions reveal that spinout dynamics are quantitatively important for aggregate innovation and growth. We find that stricter non-compete laws reduce spinout formation, dampening innovation and growth.
Education Subsidies, Tax Design, and Earnings Inequality: A Cross-Country Analysis
(with Oliko Vardishvili and Fuzhen Wang)
New draft!
Abstract: This paper re-examines the conventional view that tax progressivity drives the large U.S.– Continental Europe (CEU) earnings inequality gap, highlighting instead the dominant role of cross-country differences in public support for higher education. We develop a general-equilibrium, overlapping-generation model of human-capital investment with discrete college choice and imperfect substitution between skilled and unskilled labor, allowing human-capital decisions and government policies to endogenously determine the skill premium. The calibrated model, disciplined by cross-country differences in education subsidies, tax design, and skill demand, closely replicates the observed patterns of inequality and its key drivers—skill supply, hours worked, and wage premium. We find that higher education subsidies account for about one-third of the U.S.–CEU inequality gap, while tax progressivity plays a minor role. These results arise because the model captures the empirically large college wage premium, which makes education decisions less responsive to taxation but more responsive to higher-education subsidies. This finding suggests that expanding access to higher education could significantly reduce inequality, while the distortionary effects of tax progressivity on enrollment decisions may be limited.