How Destructive is Innovation?, with Chang-Tai Hsieh & Pete Klenow, Revise and Resubmit, Econometrica
Coverage: NBER Digest, Chicago Booth Review, Financial Times, Bloomberg.
Entrants and incumbents can create new products and displace the products of competitors. Incumbents can also improve their existing products. How much of aggregate growth occurs through each of these channels? Using U.S. Census data on non-farm private businesses from 1976-2013, we arrive at three main conclusions: First, most growth appears to come from incumbents. We infer this from the modest employment share of entering firms (defined as those less than 5 years old). Second, most growth seems to occur through improvements of existing varieties rather than creation of brand new varieties. Third, own-product improvements by incumbents appear to be more important than creative destruction. We infer this because the distribution of job creation and destruction has thinner tails than implied by a model with a dominant role for creative destruction.
The Financing of Ideas and the Great Deviation (job market paper)
Awarded the Kauffman Dissertation Fellowship (2014), Ewing Marion Kauffman Foundation.
Why did the Great Recession lead to such a slow recovery? I build a model where heterogeneous firms invest in physical and in intangible capital, and can default on their debt. In case of default, intangible assets tend to be harder to seize by external investors. Hence, financing intangible capital faces higher costs than financing physical capital. This differential is exacerbated in a financial crisis, when default is more likely and aggregate risk bears a higher premium. The resulting fall in intangible investment amplifies the crisis, and gradual intangible capital spillovers to other firms contribute to its persistence. Using a rich panel dataset of Spanish manufacturing firms, I estimate the model by matching firm-level moments regarding physical and intangible investment and financing. The model captures the extent and components of the Great Recession, as incumbent intangible investment falls and firm exit rates surge. A standard model without endogenous intangible investment would miss half of the 2008-2013 GDP fall in Spanish manufacturing. Targeted fiscal policy could speed up the recovery: transfers to young firms relax the borrowing constraints of the firms with higher returns to investment and mitigate the fall in GDP.
Macroprudential Policy with Liquidity Panics, with Alonso Villacorta
Runner-up of the Ieke van den Burg Prize for Research on Systemic Risk (2016), European Central Bank
We analyze the optimality of macroprudential policies in an environment where the role of the banking sector is to efficiently allocate liquid assets across firms. Informational frictions in the banking sector can lead to an interbank market freeze. Firms react to the breakdown of the banking system by inefficiently accumulating liquid assets by themselves. This reduces the demand for bank loans and bank profits, which further disrupts the financial sector and increases the probability of a freeze, inducing firms to hoard even more liquid assets. Liquidity panics provide a new rationale for stricter liquidity requirements, as this policy alleviates the informational frictions in the banking sector and paradoxically can end up increasing aggregate investment. On the contrary, policies encouraging bank lending can have the opposite effect.
Corporate Financing of Innovation and the Medium-Run Cycle
Sean Buckley Memorial Award for the Best Second-Year Paper (2013), Economics Department, Stanford University.
I document that publicly-listed firms which are intensive in innovation (intangible capital formation) are less able to engage in volatile external financing flows. The effect is primarily due to debt financing; equity financing acts as a partial substitute. Then, I develop a business cycle model with endogenous innovation that incorporates these facts in order to explain the short and medium-run effects of financial shocks. The increases in the cost of debt and venture capital financing during the Great Recession can explain an important part of the ensuing deviation of output from trend, as the reduction in innovation amplifies persistence.
An Open-Economy Neoclassical Growth Model with a Two-Party System (with Pau Roldan & Peter Zorn), Addenda Review, 3, Spring 2012.
We construct an open-economy Neoclassical growth model with the particularity that two parties which have different views of the value of consumption when they are in office alternate in power. The base of the model is inspired in Aguiar and Amador (2010), but by introducing party heterogeneity on top of lack of commitment we are able to extend its insights and focus on the effects of the interaction between successive governments. We find that party heterogeneity gives rise to a pseudo steady state with a two-period cycle. Increased preference of parties for shifting consumption to their periods decreases the two steady-state values of capital compared to the first-best and to the case of a single party ruling forever. However, the more ‘spending’ party is able to enjoy higher capital and consumption levels than its opponent in the periods it is in office. Our model determines the dynamics of these two endogenous variables, as well as of taxes, transfers, foreign debt and trade balances for a given initial value of foreign debt.