This paper uncovers a novel interaction between production efficiency and economic stability. Using a tractable heterogeneous firms model, I prove the existence of an efficiency-stability trade-off in granular economies. Specifically, reducing misallocation increases business cycle volatility. This trade-off originates because firms choose their optimal size without internalizing their effect on aggregate consumption risk. Utilizing approximations and results on order statistics, I propose a tractable method to quantify this effect and show that commonly studied misallocation counterfactuals involve a sizeable increase in business cycle volatility. I discuss how different assumptions on the nature of misallocation and factor mobility influence this result.
The racial wealth gap is one of the most striking and persistent disparities between Black and White households in the US. We study the determinants of this gap using a general equilibrium incomplete market model featuring dynamic discrete entrepreneurship choice and an empirically estimated income process. In the model, Black households face: (i) higher capital costs as entrepreneurs; (ii) a labour-income gap; and (iii) greater non-employment risk. We find that access to capital for Black entrepreneurs accounts for most of the racial wealth gap. Our model demonstrates that wealth transfers without social change cannot permanently address this gap and points towards addressing barriers faced by Black entrepreneurs as a key margin of intervention.
Welfare effects of changing insurance composition from UIB to termination notice
Insuring households against unemployment risk is a cornerstone of modern economic policy. Many countries provide unemployment insurance partly by employment protection mandates, most commonly using termination notice mandates. Unlike unemployment insurance benefits, termination notices can stimulate search effort by the unemployed. I formalize this idea using a calibrated heterogeneous agents model, show how termination notice alters the incentives of firms and workers and study the insurance role of a termination notice in general equilibrium. I demonstrate how termination notice mandates and unemployment insurance benefits are complementary policies. Finally, I also compare between termination notice and severance pay.
Impulse Responses to a One Standard Deviation Credit Supply Shock by Strictness of Employment Protection (EPL) - OECD economies
Firing restrictions are in use throughout the developed world but their role in the transmission of macroeconomic shocks into the real economy is mostly unstudied. We illustrate the theoretical role of these policies as amplifiers of macroeconomic shocks via labor-misallocation-induced output losses following an adverse shock. We use our model to derive an aggregation result which features a labor misallocation term and conduct a simulation exercise which demonstrates how misallocation can drive total factor productivity (TFP) down during recessions. We then perform a quasi-natural experiment which utilizes global credit supply shocks to study this amplifying role using a panel of 21 OECD economies. We show that strict firing restrictions are associated with a weaker initial response of the labor market, which is followed by a stronger and more persistent decline in real output as well as a slower return of real activity to pre-shock levels. The stronger output decline can be mostly explained by a stronger fall in aggregate TFP, which supports our theoretical predictions.
Works in Progress
Pareto Tail Aggregation - A Granular Theory of TFP, Growth, and Misallocation - Draft coming soon
Macroeconomic stability and employment protection mandates: an optimal design approach
The crowding out effects of land privatisation on entrepreneurial credit: evidence from 1700-1830 Britain, with Karine van der Beek and Lior Farbman
The Distributional Effects of Employment Protection - Labour Regulation and Inequality
Frictional worker and firm dynamics with two-sided heterogeneity (project title), with Lukas B. Freund