Financing the Future: Firm Selection and Productivity Dynamics Under Financial Frictions
w/ Ufuk Akcigit and Harun Alp Working Paper Presented at ASSA '21 2021 |
Abstract: We build a growth model with heterogeneous firms that endogenizes productivity growth, firm selection and borrowing under financial frictions. In particular, facing an incomplete financial market with endogenous (firm-specific) interest rate spreads and borrowing constraints, firms choose productivity enhancing investments and debt with an option to default. We calibrate our model with micro data on US firms, finding that financial frictions can be very pervasive. Frictions strongly select against high-growth firms. A key trade-off emerges as relaxing frictions promotes innovation by financially healthy firms while also potentially producing financially distressed firms. We conduct experiments by analyzing several degrees of financial frictions (e.g., no debt market, no unsecured debt, no tax shield), finding a welfare swing of 5.13% between the least to the most frictional economy. Strikingly, without firm heterogeneity, this welfare gap would be more than halved to 2.45%. That is, firm heterogeneity and selection strongly increase the economy's sensitivity to frictions. We also study optimal subsidy policies across the counterfactual economies, finding that frictions increase the effectiveness of subsidies. Under optimal subsidies, the welfare gap between counterfactuals is reduced to 2.85%.
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Delayed Arrival: Settlement Timing and Welfare Losses in Lawsuits (PDF)
Honors Thesis in Economics, University of Chicago 2020 |
Abstract: Settlements are instruments to expedite case resolution. Though most civil cases are settled, these settlements are often achieved after long periods of expensive litigations, causing avoidable inefficiencies. In this paper, I examine these inefficiencies and the decisions that produce them. First, I construct a tractable and flexible bargaining model with time-varying flow costs and endogenous delays. Second, I estimate this structural model with a proprietary Cornerstone Research dataset. In this process, I devise robust strategies to account for unobserved heterogeneities. Third, I quantify the inefficiencies caused by settlement delays. Fourth, I evaluate welfare improvements associated with accelerated court judgements. My key finding is that settlement delays create significant welfare losses which government policies about court acceleration can do little to mitigate.
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