Working Papers

Equity Frictions and Firm Ownership (June 2021) -- Revise and Resubmit at Review of Economic Studies

In this paper, I document systematic heterogeneity in ownership and financing of firms across Eurozone countries. To rationalize these differences, I build a quantitative general equilibrium model of workers and entrepreneurs who choose debt and equity financing of their firms subject to rich country-specific financial frictions. The novel data on firm ownership and financing combined with the structure of the model allows me to quantify the level of debt and equity frictions in each country. Quantitatively, I find much larger output effects from equity frictions: harmonizing them across countries would lead to nearly five times larger output effects compared to debt frictions, removing them would increase aggregate output by more than twice as much. The larger impact on output is due not only to the estimated levels and dispersion of equity frictions, but also to the fact that equity provides greater risk sharing which further incentivizes entrepreneurs to expand their firms. Through their effect on risk sharing, equity frictions also rationalize the observed negative relationship between equity financing and wealth inequality. Quantitatively, they are responsible for over 80% of the variation in top wealth shares across countries.

Nonlinear Pricing and Misallocation (August 2022)

(with Gideon Bornstein)

This paper studies the effect of nonlinear pricing on markups and misallocation. We develop a general equilibrium model of firms that are allowed to set a quantity-dependent pricing schedule---contrary to the typical assumption in macroeconomic models. Without the restriction to linear pricing, markup heterogeneity is no longer a sign of misallocation. Larger firms charge higher markups, yet the allocation of resources across firms is efficient. Further, we point to a new source of misallocation. In general equilibrium, high-taste consumers are allocated too much of each good, low-taste consumers too little. When labor supply is elastic, firms' market power depresses aggregate labor, but this effect is independent of the level of the aggregate markup in the economy. Using micro data from the retail sector, we show that nonlinear pricing is prevalent and quantify the model. We find that the welfare losses from misallocation across consumers under nonlinear pricing are twice as large as those from misallocation across firms under linear pricing.

The Aggregate Importance of Intermediate Input Substitutability (September 2022)

(with Cian Ruane)

We estimate long-run elasticities of substitution between intermediate inputs for Indian manufacturing plants. India's trade liberalization in the early 1990s provides an ideal natural policy experiment, with permanent and heterogeneous tariff reductions inducing changes in relative prices which we use for identification. We find a high degree of substitutability at the plant-level between 8 broad categories of material inputs, significantly above the Cobb-Douglas benchmark of 1. In contrast, we find elasticities less than 1 between energy, materials, and services as well as between value added and intermediates. We embed our elasticities in a general equilibrium model with a rich input-output structure to quantify their importance. Relative to a Cobb-Douglas benchmark, the aggregate gains from trade are 9% larger when intermediate inputs are substitutes, and come hand in hand with 40% more reallocation of labor across sectors. Furthermore, the aggregate gains from closing the India-U.S. TFP gap in any one sector are on average 29% larger with our estimated elasticities; losses from misallocation of intermediate inputs are more than 3 times larger.

Distribution Costs (January 2022)

(with Cian Ruane)

We provide the first direct estimates of distribution expenses incurred by manufacturing plants and assess their importance for aggregate output. Using a novel measure from the Indian Annual Survey of Industries, we document three key facts: (1) distribution expenses are large -- they amount to over half of labor costs; (2) plants in the largest decile -- relative to the smallest -- spend over three times as much on distribution as a share of sales; and (3) between 2000 and 2010, distribution costs as a share of sales declined by one third. We develop a model of heterogeneous manufacturing firms that rely on the distribution sector to sell their goods across space. We quantify the model using the facts on size and systematic heterogeneity in distribution shares as well as newly constructed estimates of intranational trade. Accounting for firm heterogeneity in distribution requirements is important: welfare losses from low TFP in the distribution sector are amplified 1.5-fold. From 2000 to 2010, India saw an increase in intranational trade hand in hand with a decrease in the distribution share. In combination with the model, these trends suggest large-scale decreases in both variable and fixed costs of distribution, leading to welfare gains of 41% over this ten year period.

Network-Based Hiring: Local Benefits; Global Costs (June 2020), NBER WP version

(with Arun G. Chandrasekhar and Melanie Morten)

Entrepreneurs, particularly in the developing world, often hire from their networks: friends, family, and resulting referrals. Network hiring has two benefits, documented extensively in the empirical literature: entrepreneurs know more about the ability of their network (and indeed they are often positively selected), and network members may be less likely to engage in moral hazard. We study theoretically how network hiring affects the size and composition (i.e., whether to hire friends or strangers) of the firm. Our primary result is that network hiring, while locally beneficial, can be globally inefficient. Because of the existence of a network, entrepreneurs set inefficiently low wages, firms are weakly too small, rely too much on networks for hiring, and resulting welfare losses increase in the quality of the network. Further, if entrepreneurs are uncertain about the true quality of the external labor market, the economy may become stuck in an information poverty trap where forward looking entrepreneurs or even entrepreneurs in a market with social learning never learn the correct distribution of stranger ability, exacerbating welfare losses. We show that the poverty trap can worsen when network referrals are of higher quality.

Work in Progress

Houses and Families across Countries [WiM talk]

(with Monika Piazzesi and Martin Schneider)

This paper studies joint variation in family structure and housing across European countries. We add to a standard consumption savings problem with housing (i) a home production technology such that the expenditure share on housing is larger for singles than couples and (ii) the option of cohabitation with parents that provides informal rental and credit markets. Assumption (i) is strongly supported by HCFS consumption data and helps explain why singles rent more than couples within countries. Cross country comparisons point to two distinct forces: in Southern Europe, weak rental markets increase ownership rates as well as cohabitation and savings by the young. Within Northern Europe, better credit markets increase ownership rates, but discourage cohabitation and savings.

Self-Employment within the Firm (January 2022: fieldwork underway)

(with Vittorio Bassi, Jung H. Lee , Tommaso Porzio, Ritwika Sen and Esau Tugume)