Misallocation and Risk
Paper Session
Sunday, Jan. 8, 2023 1:00 PM - 3:00 PM (CST)
- Chair: Christopher Tonetti, Stanford University
Firm Dynamic Hedging and the Labor Risk Premium
Abstract
The labor risk premium is a wedge in labor demand that reflects the covariance of the marginal product of labor with the employer's stochastic discount factor. We build a heterogeneous-agent incomplete-market model to measure and understand the labor risk premium and its effect on macroeconomic aggregates. Persistent uninsurable idiosyncratic risk creates a dynamic hedging motive for labor demand and heterogenous labor risk premiums. High productivity firms have higher risk premiums, which create endogenous misallocation. Aggregate fluctuations in idiosyncratic risk change the distribution of risk premiums, and are reflected in time-varying labor and TFP wedges.Risk-Taking, Capital Allocation and Monetary Policy
Abstract
We study the implications of firm heterogeneity for business cycle dynamics and monetary policy. Firms differ in their exposure to aggregate risk, which leads to dispersion in costs of capital that influence micro-level resource allocations. The heterogeneous firm economy can be recast as a representative firm New Keynesian model, but where total factor productivity (TFP) endogenously depends on the micro-allocation. The monetary policy regime determines the nature of aggregate risk and hence shapes the allocation and long-run level/dynamics of TFP. Welfare losses from policies ignoring heterogeneity can be substantial, which stem largely from a less productive allocation of resources.Why Are Returns to Private Business Wealth So Dispersed?
Abstract
We use micro data from Orbis on firm level balance sheets and income statements to document that accounting returns for privately held businesses are dispersed, persistent, and negatively correlated with firm equity. We also show that firms experience large, fat-tailed, and partly transitory changes in output that are not fully accompanied by changes in their capital stock and wage bill. This implies that capital and labor choices are risky, as fluctuations in output are accompanied by large changes in firm profits. We interpret this evidence using a model of entrepreneurial dynamics in which return heterogeneity can arise from both limited span of control, as well as from financial frictions which generate differences in financial returns to saving. The model matches the evidence on accounting returns and predicts that financial returns to saving are half as large and dispersed as accounting returns. Financial returns mostly reflect risk, as opposed to collateral constraints which play a negligible role due to firms’ unwillingness to expand and take on more risk.JEL Classifications
- E22 - Investment; Capital; Intangible Capital; Capacity
- O40 - General