Job Market Paper | July 2016
Financial frictions can reduce aggregate productivity, in particular when firms with high
productivity cannot borrow against their profits. This paper investigates the quantitative
importance of this form of borrowing constraint using a large panel of firms in Japan. The firms
are young and unlisted, precisely the firms for which credit frictions are expected to be the
most severe. In this data, I find that firm leverage (asset-to-equity ratio) and firm
output-to-capital ratios rise with firm productivity, both over time in a firm and across firms of the same age and cohort. I use these facts in indirect inference to estimate a standard general equilibrium model where financial frictions arise from the limited pledgeability of profits and capital. In this model more financially constrained firms have higher output-to-capital ratios. The model matches the two facts the best when firms can pledge half of their one-year-ahead profits and one-fifth of their assets. Compared to the common assumption that firms can pledge only assets, aggregate productivity loss due to financing frictions is one-third smaller when profits are also pledgeable to the degree seen in Japan.
2017-04 | With Aghion, Bergeaud, Boppart, and Klenow | January 2017
Statistical agencies typically impute inflation for disappearing products from the inflation rate for surviving products. As some products disappear precisely because they are displaced by better products, inflation may be lower at these points than for surviving products. As a result, creative destruction may result in overstated inflation and understated growth. We use a simple model to relate this “missing growth” to the frequency and size of various kinds of innovations. Using U.S. Census data, we then apply two ways of assessing the magnitude of missing growth for all private nonfarm businesses for 1983–2013. The first approach exploits information on the market share of surviving plants. The second approach applies indirect inference to firm-level data. We find: (i) missing growth from imputation is substantial—0.5 percentage points per year when using the first approach, 1 percentage point per year using the second method; and (ii) almost all of the missing growth is due to creative destruction (as opposed to new varieties).
Stanford Manuscript | With Bollard and Klenow | June 2016
Across cohorts of firms and plants within the U.S., Indonesia, India and
China, we find that average discounted profits rise systematically with average labor productivity at the time of entry. The number of entrants, in
contrast, is weakly connected to average labor productivity but closely tied
to aggregate employment. In many models of firm dynamics, growth, and
trade, these facts imply that the cost of creating a new business is increasing with average productivity given a zero profit condition for entrants. Entry costs could rise as development proceeds because entry is laborintensive and/or because it is more expensive to set up firms using more skilled workers and more sophisticated technology.
Manuscript | With Armstrong, Gallant, and Hong | August 2015
We study the asymptotic distribution of simulation estimators, where the same set of draws are used for all observations under general conditions that do not require the function used in the simulation to be smooth. We consider two cases: estimators that solve a system of equations involving simulated moments and estimators that maximize a simulated likelihood. Many simulation estimators used in empirical work involve both overlapping simulation draws and non-differentiable moment functions. Developing sampling theorems under these two conditions provides an important complement to the existing results in the literature on the asymptotics of simulation estimators.