Owning Up: Closely Held Firms and Wealth Inequality [Job Market Paper]
This paper studies how frictions in debt and equity markets affect wealth inequality in Eurozone countries. Using micro data on households and firms, I document that in more unequal countries, there are more privately held firms, and ownership of publicly traded firms is more concentrated.
I develop a dynamic general equilibrium model in which entrepreneurs have the option to run a private firm and issue debt, or go public and also issue outside equity.
Both forms of external finance are subject to country-specific frictions. With more access to debt, entrepreneurs can run larger firms and are wealthier. Similar to debt, outside equity allows entrepreneurs to increase investment in
their firm, but it also reduces their risk exposure, which lowers savings and wealth holdings. When parameters are chosen to match the facts I document on firm ownership and financing,
the model successfully predicts differences in wealth concentration across countries.
The Aggregate Importance of Intermediate Input Substitutability (with Cian Ruane)
Should economic development policies target specific sectors of the economy or follow a 'big push' approach of advancing all sectors together? The relative success of these strategies is determined by how easily firms can substitute between intermediate inputs sourced from different sectors of the economy: a low degree of substitutability increases the costs from 'bottleneck' sectors and the need for 'big push' policies. In this paper, we estimate long-run elasticities of substitution between intermediate inputs used by Indian manufacturing plants. We use detailed data on plant-level intermediate input expenditures, and exploit reductions in import tariffs as plausibly exogenous shocks to domestic intermediate input prices. We find a long-run plant-level elasticity of substitution of 4.3, much higher substitutability than existing short-run estimates or the Cobb-Douglas benchmark. To quantify the aggregate importance of intermediate input substitution, we embed our elasticities in a general equilibrium model with heterogeneous firms, calibrated to plant- and sector-level data for the Indian economy. We find that the aggregate gains from a 50% productivity increase in any one Indian manufacturing sector are on average 47% larger with our estimated elasticities. Our counterfactual exercises highlight the importance of intermediate input substitution in amplifying policy reforms targeting individual sectors.
Distribution Costs and the Size of Indian Manufacturing Establishments (with Cian Ruane)
The sale of manufacturing goods involves costs of distribution such as shipping, insurance and commissions. Using micro-data from India's Annual Survey of Industries, we document that larger plants spend a larger share of their sales on distribution. We ask to what degree these distribution costs act as a constraint on larger firms and can explain the high employment share in small plants. To explore this mechanism, we develop a simple general equilibrium model in which heterogeneous firms face fixed and variable costs of distributing their products to customers. Firms selling higher quality products sell to more distant customers and incur higher distribution expenses. We carry out some preliminary quantitative exercises to explore how much reducing the rate at which distribution cost increase with distance in our model affects aggregate consumption and the firm size distribution.
Houses and Families across Countries (with Monika Piazzesi and Martin Schneider) (slides)
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.
Contract Structure, Social Networks, and Firm Size (with Arun Chandrashekhar and Melanie Morten)
Facing contracting problems, small-scale entrepreneurs in the developing world rely on networks -
social contacts, kin, referrals - to hire workers. As networks are sparse, people have few contacts, this limits the size
of firm growth. We develop and study a model of firm scale and wage structure choice where entrepreneurs, who face worker
moral hazard, can hire workers from a general pool as well as their own sparse network. We then conduct a two-phase experiment
in Bangalore, India whereby subjects create and operate ~120-200 delivery firms. In phase 1, we randomly vary
(i) the degree to which managers face worker moral hazard; (ii) the maximal scale of firm; (iii) the extent to which
workers can be hired out of the network. We study the equilibrium wage, profits, and worker effort. In phase 2, we surprise
entrepreneurs with a continued opportunity to operate their firms. Entrepreneurs are randomized into one of three conditions
where they make willingness-to pay decisions: (i) hiring strangers versus network members; (ii) operating under moral hazard
or no moral hazard; (iii) operating large or small firms. We can study how choice varies as a function of the randomization and history in phase 1; that is, how experience and exposure shapes willingness to pay.