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Entry Decision, the Option to Delay Entry, and Business Cycles

Updated version!

Abstract:  I show that firms' ability to postpone entry has important implications for our understanding of the observed business cycle behavior of start-ups. I use a model that closely replicates the main features of the US firm dynamics to explore and quantify the mechanism. I find that the option to wait endogenously generates a countercyclical opportunity cost of entry: During recessions, a higher risk of failure increases the value of waiting, hence the cost of entry. The mechanism increases the elasticity of entrants to aggregate shocks five times. It is responsible for three-fourths of the observed persistent differences in the recessionary and expansionary cohorts' productivity, survival, and employment. Without the channel, existing models require either large shocks that generate excessive aggregate fluctuations or exogenous mechanisms to reconcile the observed dynamics of entrants. Overlooking this channel may also result in misleading predictions about entrants' responses to different shocks or policies.

Presented at:  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

Sovereign Risk and Economic Activity: The Role of Firm Entry and Exit ~ R&R 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 a credit-supply channel explaining the sovereign risk-entry relationship but not for the sovereign risk-exit relationship. We develop a model with sovereign risk, financial frictions and endogenous firm dynamics. Calibrated with data around the Portuguese debt crisis, the model predicts that sovereign risk explains 60% of the fall in entry and most of the exit dynamics. The extensive margin explains 80% of the output fall in the long-run.

Presented at: 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
(with Eugene Tan and Poorya Kabir)

New version!
Abstract: We show that in a standard neoclassical investment model with heterogeneous firms and endogenous capital utilization, aggregate allocative efficiency is determined by the joint distribution of capital and utilization. Therefore, dispersion in average revenue products of capital (ARPK) alone is uninformative of gains to capital reallocation. We provide direct evidence supporting the mechanism, and demonstrate counterfactual exercises where aggregate productivity gains are accompanied by higher ARPK dispersion. Applying the framework to a capital market reform in India reveals that decreased ARPK dispersion reflects convergence in utilization rates, not implicit capital costs, challenging conventional interpretations of the reform’s impact on misallocation.

Presented at ASSA 2024, University of North Carolina Chapel Hill 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

Endogenous Affordability and Income Inequality  
(with Oliko Vardishvili and Fuzhen Wang)

Draft coming soon!

Abstract: We show that the variations in education affordability — the proportion of post-secondary education costs directly funded by the government  — significantly contribute to the widening income inequality gap between the US and continental European countries.  Utilizing the cross-country OCED data, we document that countries with higher tax progressivity are associated with more affordable education. At the same time, we find a statistically significant and negative relationship between education affordability and income inequality.  Contrary to existing literature, our findings suggest that when accounting for the general equilibrium effects,  labor tax progressivity has a minor impact on earnings inequality, while education affordability plays an important role in the dynamics of income inequality -- cheaper education motivates skill supply and reduces the college wage premium. Our quantitative findings reveal that if the US were to adopt Germany's education policy, earnings inequality, measured by the pre-tax gross earnings' Gini coefficient, would decrease by 6.8 percent. Moreover, our analysis of transitional dynamics shows that each new generation would experience improved welfare. 



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