Large Firms and Long-run Growth (Job Market Paper)
The market share of large firms in the U.S. has been on the rise in the past three decades. This paper quantifies the effects of this change on labor productivity growth. It develops a tractable endogenous growth model with both large and small firms, and shows that as the market share of large firms grows, productivity growth first increases and then declines. This is due to the change in the incentives of large firms to do research and development (R&D). To validate this relationship, the paper uses a panel of U.S. industries and documents that the industry level R&D-intensity has an inverted-U relationship with the market share of large firms. To explore the macro implications of this mechanism, the paper calibrates the model to match the aggregate moments of the U.S. economy. The exercise shows that as the share of large firms increased, productivity growth increased until the late nineties and then declined. An important implication of the model is that as the economy becomes more concentrated, recessions become deeper and recoveries slower.
Implications of Tax Policy for Innovation and Aggregate Productivity Growth, with D. Ferraro and P. Peretto
The quantitative implications of income taxation for innovation and aggregate productivity growth are evaluated in the context of a Schumpeterian model of innovation-led growth. In the model, innovation comes from entrant firms creating new products and from incumbent firms improving own existing products. The model embodies key features of the U.S. government sector: (i) an individual income (labor income, dividends, and capital gains) and (ii) corporate tax; (iii) a consumption tax; and (iv) government purchases. The model is further restricted to fit observations for the post-war U.S. economy. The results suggest that endogenous movements in TFP constitute a quantitatively important channel for the transmission of tax policy to real GDP growth. Endogenous market structure plays a key role in the propagation of tax shocks.
Monitoring and Evaluation by Financiers and Investor Activism, with D. Bernhardt
This paper considers a financier contemplating a venture capital investment in a firm whose true value is unknown. The financier makes information–gathering and investment decisions on an ongoing basis to decide whether to undertake the investment and, later, if she chooses to finance the firm, how to manage her investment. We characterize how the financier’s information acquisition is affected by the liquidity of the market for her claims to the firm, and derive the implications for the pricing of the firm. We distinguish between two qualitatively different types of information acquisition: evaluation efforts made prior to a potential investment; and monitoring efforts of already funded firms that impact upon the financier’s decisions about whether to take an active position in the firm (e.g. replace management) and whether to change its financial stake. We investigate the effects of liquidity on share price, describing why the market responds more favorably to less liquid forms of finance, and explore the consequences for investor activism. Finally, we characterize the socially optimal levels of evaluation and monitoring in order to determine when a marginal increase in liquidity has welfare–enhancing effects on the financier’s behavior.