Firm Investment with Shareholder Inequality (link) (Job Market Paper)
Does rising household income risk change aggregate investment and output by corporate firms? To answer this question, I study a stochastic, general equilibrium model featuring aggregate risk, incomplete markets, households who are heterogeneous in productivity and wealth, and shareholder-owned firms that own capital. The firm’s objective is typically not well defined in models like this, so I introduce a pair of financial intermediaries that jointly pin the firm’s behavior. In equilibrium, firms maximize their net market value (or cum-dividend share price), which is determined by the post-trade share-weighted marginal rate of substitution. This method nests both the standard representative household case and a variety of no-trade models popular in the literature. I then apply this model to the data to see how a change in earnings variance between 1970 and 2010 changes firm dynamics. Increased household idiosyncratic risk causes firms to accumulate more capital, resulting in lower consumption and output volatility over the business cycle. I also find that the observed change in the idiosyncratic productivity process for US households can explain 60% of the decline in dividend yields between 1970 and 2010 and over half of the rise in the price-earnings ratio. Additionally, my model generates the procyclical price-earnings ratio and countercyclical equity rate of return observed in the data.
How Do Evolving Common Ownership Motives Shape Capital Investment? (link)
The common ownership hypothesis suggests that firms compete less vigorously with each other to maximize portfolio profits. What does this hypothesis mean for aggregate investment as portfolio motives grow over time? As the common ownership motive grows, firms decrease their investment because they know a larger capital stock will cut into portfolio profits. While the existing literature on common ownership focuses on static competition, this paper demonstrates that portfolio maximization also shrinks aggregate investment, output, and consumption. Common ownership motives may partly explain the decline in buysiness dynamism through a declining capital stock, higher markups, and lower labor share. I also find that markups respond nonlinearly to increases in common ownership, which differs from existing empirical studies.
Firm Size Distribution and the Increase in Mark-ups (with Rohan Shah)
The size-distribution of firms in the US has shifted rightward over the previous 40 years, such that BDS data indicate the average size of a firm has increased by almost 20% between 1978 (21 employees, on average) and 2016 (25 employees). At the same time, there is evidence (such as that in De Loecker, Eeckhout & Unger (2020)) that firm mark-ups have increased by as much as 27% over the period 1986 - 2016. We investigate the extent to which the rightward shift in the firm-size distribution can explain the increase in mark-ups using a model of heterogeneous firms with endogenous entry and exit. Firms in our model charge a mark-up that varies according to their size via the Kimball aggregator, which allows us to examine the effect of different distributions of firms on the average mark-up. We calibrate our model to match the firm-size distribution in each of 1986 and 2016 and find that the changes in firm size over that timeframe imply an increase in mark-up of 17%. In other words, changes in the firm-size distribution can explain roughly 63% of the observed change in mark-ups over the same period.