Papers
- Idiosyncratic Shocks and Investment Irreversibility: Capital Misallocation over the Business Cycle - paper appendix
with Iacopo Varotto
This study examines the cyclical implications of capital misallocation using a dynamic stochastic general equilibrium model with heterogeneous firms and partially irreversible investment. We find that investment irreversibility plays a prominent role in business cycles in the model where aggregate uncertainty stems from firm-level idiosyncratic shocks rather than aggregate shocks. Investment irreversibility worsens capital misallocation, reflected in a declining covariance between firm-level productivity and capital stock. While investment irreversibility dampens aggregate output volatility, the covariance fluctuations account for a substantial portion of output volatility, which highlights the importance of micro-level investment irreversibility as a propagation mechanism for idiosyncratic shocks in shaping macroeconomic fluctuations, contrasting with its irrelevance in economies with only aggregate shocks. We also provide empirical measures of capital misallocation to validate the model predictions.
with Iacopo Varotto
This study examines the cyclical implications of capital misallocation using a dynamic stochastic general equilibrium model with heterogeneous firms and partially irreversible investment. We find that investment irreversibility plays a prominent role in business cycles in the model where aggregate uncertainty stems from firm-level idiosyncratic shocks rather than aggregate shocks. Investment irreversibility worsens capital misallocation, reflected in a declining covariance between firm-level productivity and capital stock. While investment irreversibility dampens aggregate output volatility, the covariance fluctuations account for a substantial portion of output volatility, which highlights the importance of micro-level investment irreversibility as a propagation mechanism for idiosyncratic shocks in shaping macroeconomic fluctuations, contrasting with its irrelevance in economies with only aggregate shocks. We also provide empirical measures of capital misallocation to validate the model predictions.
- A New Look at Uncertainty Shocks: Imperfect Information and Misallocation - paper appendix data replication
(2nd) R&R Econometrica
New version coming soon...
Uncertainty faced by individual firms appears to be heterogeneous. In this paper, I construct a new set of empirical measures of firm-level uncertainty using data such as the IBES and Compustat. The panel data that I construct reveals persistent differences in the degree of uncertainty facing individual firms not reflected by existing measures. Consistent with existing measures, I find that the average level of uncertainty across firms is countercyclical, and that it rose sharply at the start of the Great Recession. I next develop a heterogeneous firm model in a setting wherein each firm gradually learns about its own productivity, and each occasionally experiences a shock forcing it to start learning afresh. Uncertainty is gradually resolved as firms operate longer and get better informed. When calibrated to reproduce the level and cyclicality of the cross-sectional dispersion of sales growth, I show that an uncertainty shock can explain 18 percent of the observed output volatility and 29 percent of the investment volatility in the data.
(2nd) R&R Econometrica
New version coming soon...
Uncertainty faced by individual firms appears to be heterogeneous. In this paper, I construct a new set of empirical measures of firm-level uncertainty using data such as the IBES and Compustat. The panel data that I construct reveals persistent differences in the degree of uncertainty facing individual firms not reflected by existing measures. Consistent with existing measures, I find that the average level of uncertainty across firms is countercyclical, and that it rose sharply at the start of the Great Recession. I next develop a heterogeneous firm model in a setting wherein each firm gradually learns about its own productivity, and each occasionally experiences a shock forcing it to start learning afresh. Uncertainty is gradually resolved as firms operate longer and get better informed. When calibrated to reproduce the level and cyclicality of the cross-sectional dispersion of sales growth, I show that an uncertainty shock can explain 18 percent of the observed output volatility and 29 percent of the investment volatility in the data.
- The International Empirics of Management - PNAS Website
with MOPS team members, Proceedings of the National Academy of Sciences (2024)
A country’s national income broadly depends on the quantity and quality of workers and capital. But how well these factors are managed within and between firms may be a key determinant of a country’s productivity and its GDP. Although social scientists have long studied the role of management practices in shaping business performance, their primary tool has been individual case studies. While useful for theory-building, such qualitative work is hard to scale and quantify. We present a large, scalable dataset measuring structured management practices at the business level across multiple countries. We measure practices related to performance monitoring, target-setting, and human resources. We document a set of key stylized facts, which we label “the international empirics of management”. In all countries, firms with more structured practices tend to also have superior economic performance: they are larger in scale, are more profitable, have higher labor productivity and are more likely to export. This consistency was not obvious ex-ante, and being able to quantify these relationships is valuable. We also document significant variation in practices across and within countries, which is important in explaining differences in the wealth of nations. The positive relationship between firm size and structured management practices is stronger in countries with more open and free markets, suggesting that stronger competition may allow firms with more structured management practices to grow larger, thereby potentially raising aggregate national income.
with MOPS team members, Proceedings of the National Academy of Sciences (2024)
A country’s national income broadly depends on the quantity and quality of workers and capital. But how well these factors are managed within and between firms may be a key determinant of a country’s productivity and its GDP. Although social scientists have long studied the role of management practices in shaping business performance, their primary tool has been individual case studies. While useful for theory-building, such qualitative work is hard to scale and quantify. We present a large, scalable dataset measuring structured management practices at the business level across multiple countries. We measure practices related to performance monitoring, target-setting, and human resources. We document a set of key stylized facts, which we label “the international empirics of management”. In all countries, firms with more structured practices tend to also have superior economic performance: they are larger in scale, are more profitable, have higher labor productivity and are more likely to export. This consistency was not obvious ex-ante, and being able to quantify these relationships is valuable. We also document significant variation in practices across and within countries, which is important in explaining differences in the wealth of nations. The positive relationship between firm size and structured management practices is stronger in countries with more open and free markets, suggesting that stronger competition may allow firms with more structured management practices to grow larger, thereby potentially raising aggregate national income.
- Uncertainty, Imperfect Information, and Expectation Formation over the Firm's Life Cycle - paper appendix
with Cheng Chen, Chang Sun, and Hongyong Zhang, Journal of Monetary Economics (2023)
Using a long-panel data set of Japanese firms that contains firm-level sales forecasts, we provide evidence on firm-level uncertainty and imperfect information over their life cycles. We find that firms make non-negligible and positively auto-correlated forecast errors. However, they make more precise forecasts and less auto-correlated forecast errors when they become more experienced. We then build a model of heterogeneous firms with endogenous entry and exit where firms gradually learn about their demand by using a noisy signal. We present our novel approach to cleanly isolate the learning mechanism from other mechanisms by using expectations data over time. We combine the model with our data to perform a non-parametric decomposition of forecast errors and find that learning accounts for between 20% to 40% of the overall decline in forecast errors over the life cycle. Our model shows that, within the context of our cross-regional data, productivity gains from removing information frictions ranges from 3% to 12%. We find a prominent role of firm entry and exit in generating high productivity gains.
with Cheng Chen, Chang Sun, and Hongyong Zhang, Journal of Monetary Economics (2023)
Using a long-panel data set of Japanese firms that contains firm-level sales forecasts, we provide evidence on firm-level uncertainty and imperfect information over their life cycles. We find that firms make non-negligible and positively auto-correlated forecast errors. However, they make more precise forecasts and less auto-correlated forecast errors when they become more experienced. We then build a model of heterogeneous firms with endogenous entry and exit where firms gradually learn about their demand by using a noisy signal. We present our novel approach to cleanly isolate the learning mechanism from other mechanisms by using expectations data over time. We combine the model with our data to perform a non-parametric decomposition of forecast errors and find that learning accounts for between 20% to 40% of the overall decline in forecast errors over the life cycle. Our model shows that, within the context of our cross-regional data, productivity gains from removing information frictions ranges from 3% to 12%. We find a prominent role of firm entry and exit in generating high productivity gains.
- Measuring Business-level Expectations and Uncertainty: Survey Evidence and the COVID-19 Pandemic - paper
with Cheng Chen and Hongyong Zhang, Japanese Economic Review (July 2021)
Utilizing a unique firm-level survey in Japan that contains five-bin forecasts for sales, we document three findings. First, firm-level subjective uncertainty is highly and positively related to volatility of past firm growth. Second, there are substantial variations in subjective uncertainty across firms, with a long right tail with extremely high subjective uncertainty. In addition, firms that have exposure to international businesses either through international trade or foreign direct investment have both higher average expected sales and subjective uncertainty. Finally, the sudden escalation of the COVID-19 pandemic in January–February 2020 led to a substantial increase in firms’ subjective uncertainty. Our triple-difference estimation results show that this effect is especially large for firms that have direct exposure to China through international trade and foreign direct investment.
with Cheng Chen and Hongyong Zhang, Japanese Economic Review (July 2021)
Utilizing a unique firm-level survey in Japan that contains five-bin forecasts for sales, we document three findings. First, firm-level subjective uncertainty is highly and positively related to volatility of past firm growth. Second, there are substantial variations in subjective uncertainty across firms, with a long right tail with extremely high subjective uncertainty. In addition, firms that have exposure to international businesses either through international trade or foreign direct investment have both higher average expected sales and subjective uncertainty. Finally, the sudden escalation of the COVID-19 pandemic in January–February 2020 led to a substantial increase in firms’ subjective uncertainty. Our triple-difference estimation results show that this effect is especially large for firms that have direct exposure to China through international trade and foreign direct investment.
- Aggregate Consequences of Credit Subsidy Policies: Firm Dynamics and Misallocation - paper appendix
with In Hwan Jo, Review of Economic Dynamics (April 2019)
Government policies that attempt to alleviate credit constraints faced by small and young firms are widely adopted across countries. We study the aggregate impact of such targeted credit subsidies in a heterogeneous firm model with collateral constraints and endogenous entry and exit. A defining feature of our model is a non-Gaussian process of firm-level productivity, which allows us to capture the skewed firm size distribution seen in the Business Dynamics Statistics (BDS). We compare the welfare and aggregate productivity implications of our non-Gaussian process to those of a standard AR(1) process. While credit subsidies resolve misallocation of resources and enhance aggregate productivity, increased factor prices, in equilibrium, reduce the number of firms in production, which in turn depresses aggregate productivity. We show that the latter indirect general equilibrium effects dominate the former direct productivity gains in a model with the standard AR(1) process, as compared to our non-Gaussian process, under which both welfare and aggregate productivity increase by subsidy policies.
with In Hwan Jo, Review of Economic Dynamics (April 2019)
Government policies that attempt to alleviate credit constraints faced by small and young firms are widely adopted across countries. We study the aggregate impact of such targeted credit subsidies in a heterogeneous firm model with collateral constraints and endogenous entry and exit. A defining feature of our model is a non-Gaussian process of firm-level productivity, which allows us to capture the skewed firm size distribution seen in the Business Dynamics Statistics (BDS). We compare the welfare and aggregate productivity implications of our non-Gaussian process to those of a standard AR(1) process. While credit subsidies resolve misallocation of resources and enhance aggregate productivity, increased factor prices, in equilibrium, reduce the number of firms in production, which in turn depresses aggregate productivity. We show that the latter indirect general equilibrium effects dominate the former direct productivity gains in a model with the standard AR(1) process, as compared to our non-Gaussian process, under which both welfare and aggregate productivity increase by subsidy policies.
- Firm-level Uncertainty and Cash Holding: Theory and Firm-level Empirical Evidence - paper
with Aubhik Khan, Economic Analysis (June 2019) - project page available at ESRI (the Cabinet Office) website in here
- project summary by Etsuro Shioji in here (Japanese)
We document three facts for publicly listed firms in Japan: (1) a secular decline in the debt-to-asset ratio between 1993 and 2017; (2) a U-shaped pattern in the cash-to-asset ratio, with a secular increase since 2000; (3) an upward shift in the volatility of sales growth after 2000 which has remained high until recently. To account for these facts, we build a general equilibrium model with heterogeneous firms that face uncertainty over idiosyncratic productivity and default risk. We calibrate the model using a panel data of Japanese public firms constructed using the Compustat database. The model predicts that uncertainty faced by firms is positively associated with cash holdings and negatively correlated with borrowings. These model predictions are empirically validated by a panel regression using our data.
with Aubhik Khan, Economic Analysis (June 2019) - project page available at ESRI (the Cabinet Office) website in here
- project summary by Etsuro Shioji in here (Japanese)
We document three facts for publicly listed firms in Japan: (1) a secular decline in the debt-to-asset ratio between 1993 and 2017; (2) a U-shaped pattern in the cash-to-asset ratio, with a secular increase since 2000; (3) an upward shift in the volatility of sales growth after 2000 which has remained high until recently. To account for these facts, we build a general equilibrium model with heterogeneous firms that face uncertainty over idiosyncratic productivity and default risk. We calibrate the model using a panel data of Japanese public firms constructed using the Compustat database. The model predicts that uncertainty faced by firms is positively associated with cash holdings and negatively correlated with borrowings. These model predictions are empirically validated by a panel regression using our data.
- Default Risk and Aggregate Fluctuations in an Economy with Production Heterogeneity - paper
with Aubhik Khan and Julia K. Thomas (November 2016)
We study aggregate fluctuations in an economy where firms have persistent differences in total factor productivities, capital and debt or financial assets. Investment is funded by retained earnings and non-contingent debt. Firms may default upon loans, and this risk leads to a unit cost of borrowing that rises with the level of debt and falls with the value of collateral. On average, larger firms, those with more collateral, have higher levels of investment than smaller firms with less collateral. Since large and small firms draw from the same productivity distribution, this implies an insufficient allocation of capital in small firms and thus reduces aggregate total factor productivity, capital and GDP. We consider business cycles driven by exogenous changes in total factor productivity and by credit shocks. The latter are financial shocks that worsen firms' cash on hand and reduce the fraction of collateral lenders can seize in the event of default. Our nonlinear loan rate schedules drive countercyclical default risk and exit. Because a negative productivity shock raises default probabilities, it leads to a modest reduction in the number of firms and a deterioration in the allocation of capital that amplifies the effect of the shock. The recession following a negative credit shock is qualitatively different from that following a productivity shock. A rise in default alongside a substantial fall in entry causes a large decline in the number of firms. Measured TFP falls for several periods, as do employment, investment and GDP. The recovery following a credit shock is gradual given slow recoveries in TFP, aggregate capital, and the measure of firms.
with Aubhik Khan and Julia K. Thomas (November 2016)
We study aggregate fluctuations in an economy where firms have persistent differences in total factor productivities, capital and debt or financial assets. Investment is funded by retained earnings and non-contingent debt. Firms may default upon loans, and this risk leads to a unit cost of borrowing that rises with the level of debt and falls with the value of collateral. On average, larger firms, those with more collateral, have higher levels of investment than smaller firms with less collateral. Since large and small firms draw from the same productivity distribution, this implies an insufficient allocation of capital in small firms and thus reduces aggregate total factor productivity, capital and GDP. We consider business cycles driven by exogenous changes in total factor productivity and by credit shocks. The latter are financial shocks that worsen firms' cash on hand and reduce the fraction of collateral lenders can seize in the event of default. Our nonlinear loan rate schedules drive countercyclical default risk and exit. Because a negative productivity shock raises default probabilities, it leads to a modest reduction in the number of firms and a deterioration in the allocation of capital that amplifies the effect of the shock. The recession following a negative credit shock is qualitatively different from that following a productivity shock. A rise in default alongside a substantial fall in entry causes a large decline in the number of firms. Measured TFP falls for several periods, as do employment, investment and GDP. The recovery following a credit shock is gradual given slow recoveries in TFP, aggregate capital, and the measure of firms.
- Firm Expectations and Investment: Evidence from the China-Japan Island Dispute - paper
with Cheng Chen, Chang Sun and Hongyong Zhang (July 2018) - featured in Nikkei (available in English here and Japanese here)
How do real-time expectations affect firms’ economic decisions? We provide evidence by using a dataset on Japanese multinational firms’ sales forecasts and exploring an unexpected escalation of a territorial dispute between China and Japan in 2012. Our estimation substantiates that, after the escalation of the dispute, affiliates of Japanese multinational firms in China experienced a sharp but temporary decline in total sales relative to affiliates in other countries and a more persistent decline in investment. Moreover, the territorial dispute has led to persistent pessimism in these firms’ expectations about future sales, which can explain 60% of the overall decline in investment.
with Cheng Chen, Chang Sun and Hongyong Zhang (July 2018) - featured in Nikkei (available in English here and Japanese here)
How do real-time expectations affect firms’ economic decisions? We provide evidence by using a dataset on Japanese multinational firms’ sales forecasts and exploring an unexpected escalation of a territorial dispute between China and Japan in 2012. Our estimation substantiates that, after the escalation of the dispute, affiliates of Japanese multinational firms in China experienced a sharp but temporary decline in total sales relative to affiliates in other countries and a more persistent decline in investment. Moreover, the territorial dispute has led to persistent pessimism in these firms’ expectations about future sales, which can explain 60% of the overall decline in investment.
- The Dynamics of Interfirm Networks and Firm Growth - discussion paper at REITI
with Daisuke Fujii and Yukiko Saito (August 2017) - a summary version appeared in VOXEU (available in here)
- used in 2018 White Paper on Small and Medium Enterprises in Japan (Chapter 1-2)
Recent empirical evidence has revealed that firm age is one of the key determinants for firm growth, while other literature points out the importance of customer-supplier networks for firm growth. This paper investigates how the inter-firm transaction network evolves over the firm lifecycle and its relationship with firm growth using large-scale firm network data in Japan. Old firms are large in size and well connected compared to young firms. In particular, older firms are connected to other older firms exhibiting positive assortativity of age. Younger firms tend to add and drop links more frequently, and the stability of a transaction link increases with its duration of active relationships, implying gradual learning of link-specific productivity over time. Moreover, firm's sales growth is positively related with the expansion of transaction partners in various measures, conditional on firm age. This suggests that the observed relationship between firm age and firm growth may be due to the lifecycle pattern of building inter-firm networks.
with Daisuke Fujii and Yukiko Saito (August 2017) - a summary version appeared in VOXEU (available in here)
- used in 2018 White Paper on Small and Medium Enterprises in Japan (Chapter 1-2)
Recent empirical evidence has revealed that firm age is one of the key determinants for firm growth, while other literature points out the importance of customer-supplier networks for firm growth. This paper investigates how the inter-firm transaction network evolves over the firm lifecycle and its relationship with firm growth using large-scale firm network data in Japan. Old firms are large in size and well connected compared to young firms. In particular, older firms are connected to other older firms exhibiting positive assortativity of age. Younger firms tend to add and drop links more frequently, and the stability of a transaction link increases with its duration of active relationships, implying gradual learning of link-specific productivity over time. Moreover, firm's sales growth is positively related with the expansion of transaction partners in various measures, conditional on firm age. This suggests that the observed relationship between firm age and firm growth may be due to the lifecycle pattern of building inter-firm networks.
Work in progress
- Do Well Managed Firms Make Better Forecasts? - NBER Working Paper 29591
with Nicholas Bloom, Taka Kawakubo, Charlotte Meng, Paul Mizen, Rebecca Riley, and John Van Reenen
with Nicholas Bloom, Taka Kawakubo, Charlotte Meng, Paul Mizen, Rebecca Riley, and John Van Reenen
- Information Acquisition and Price Setting under Uncertainty: New Survey Evidence - RIETI Discussion Paper Series 20-E-078
with Cheng Chen, Chang Sun, and Hongyong Zhang
with Cheng Chen, Chang Sun, and Hongyong Zhang
- Heterogeneous Firms, Rational Inattention, and the Business Cycle - draft available upon request
with Iacopo Varotto
with Iacopo Varotto
- Non-linear Dynamics of Firm Productivity - draft available upon request
with Giulio Fella, Juan Carlos Garcia, Beatriz Gonzalez, Julio Galvez.
with Giulio Fella, Juan Carlos Garcia, Beatriz Gonzalez, Julio Galvez.
- Firm Debt and Default over the Pandemic and Recovery - draft available upon request
with In Hwan Jo, Aubhik Khan, and Julia K. Thomas
with In Hwan Jo, Aubhik Khan, and Julia K. Thomas
- The Persistent Effects of Entry and Exit
with Aubhik Khan and Julia K. Thoams
with Aubhik Khan and Julia K. Thoams