Entry Decision, the Option to Delay Entry, and Business Cycles ~ R&R at RED
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)
New version!
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.
​
Presented at: 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
(with Eugene Tan and Poorya Kabir)
New version!
Abstract: We show that in economies with endogenous capital utilization, greater responsiveness of utilization to productivity shocks improves allocative efficiency of capital services - and thus aggregate productivity -, but also increases dispersion of average revenue product of capital (ARPK), contrary to common wisdom. We provide evidence supporting the mechanism and demonstrate counterfactuals where aggregate productivity gains are accompanied by higher ARPK dispersion. Lastly, we apply our framework to study the impact of a creditor protection reform in India. We estimate the reform improved aggregate TFP by 0.2%, but counterfactual analysis neglecting the endogenous response of utilization would have concluded gains of 3.7%.
​
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.
​