Economic Fluctuations and Growth

February 24, 2017
Laura Veldkamp of New York University and Jon Steinsson of Columbia University, Organizers

Matthias Kehrig, Duke University, and Nicolas Vincent, HEC Montreal

Do Firms Mitigate or Magnify Capital Misallocation? Evidence from Plant-Level Data

Almost two thirds of the cross-plant dispersion in marginal revenue products of capital occurs across plants within the same firm rather than between firms. Even though firms allocate investment very differently across their plants, they do not equalize marginal revenue products across their plants. Kehrig and Vincent reconcile these findings in a model of multi-plant firms, physical adjustment costs and credit constraints. Credit constrained multi-plant firms can utilize internal capital markets by concentrating internal funds on investment projects in only a few of their plants in a given period and rotating funds to another set of plants in the future. The resulting increase in within-firm dispersion of marginal revenue products of capital is hence not a symptom of misallocation within the firm, but rather actions taken by the firm to mitigate external credit constraints and adjustment costs of capital. Economies with multi-plant firms produce more aggregate output despite higher dispersion in marginal revenue products of capital compared to economies with single-plant firms. Because emerging economies are predominantly populated by single-plant firms, the gains from reducing their distortions to the level of developed are larger than previously thought.

Daniel Garcia-Macia, International Monetary Fund; Chang-Tai Hsieh, the University of Chicago and NBER; and Peter Klenow, Stanford University and NBER

How Destructive is Innovation? (NBER Working Paper No. 22953)

Entrants and incumbents can create new products and displace the products of competitors. Incumbents can also improve their existing products. How much of aggregate productivity growth occurs through each of these channels? Using data from the U.S. Longitudinal Business Database on all non-farm private businesses from 1976-1986 and 2003-2013, Garcia-Macia, Chang-Tai Hsieh and Peter Klenow arrive at three main conclusions: First, most growth appears to come from incumbents. They infer this from the modest employment share of entering firms (defined as those less than 5 years old). Second, most growth seems to occur through improvements of existing varieties rather than creation of brand new varieties. Third, own-product improvements by incumbents appear to be more important than creative destruction. Authors infer this because the distribution of job creation and destruction has thinner tails than implied by a model with a dominant role for creative destruction.

George-Marios Angeletos, MIT and NBER, and Chen Lian, MIT

Forward Guidance without Common Knowledge (NBER Working Paper No. 22785)

Angeletos and Lian study how forward guidance — and macroeconomic policy more generally — relies on shifting expectations, not only of future policy, but also of future economic outcomes such as income and inflation. These expectations matter through general-equilibrium mechanisms. Recasting these expectations and these mechanisms in terms of higher-order beliefs reveals how standard policy predictions hinge on the assumption of common knowledge. Relaxing this assumption anchors expectations and attenuates the associated general-equilibrium effects. In the context of interest, this helps lessen the forward-guidance puzzle, as well as the paradox of flexibility. More broadly, it helps operationalize the idea that policy makers may find it hard to shift expectations of economic outcomes even if they can easily shift expectations of policy.

Barney Hartman-Glaser, the University of California at Los Angeles; Hanno Lustig, Stanford University and NBER; and Mindy Zhang, the University of Texas at Austin

Capital Share Dynamics When Firms Insure Managers (NBER Working Paper No. 22651)

The share of the average firm's value added that accrues to its owners has declined, even though the aggregate capital share has increased. These changes in factor shares partly reflect a larger firm-level risk insurance premium paid by workers to owners. The largest firms in the right tail account for a larger share of output, but the compensation of workers at these firms has not kept up. Hartman-Glaser, Lustig, and Zhang develop a model in which firms provide managers with insurance against firm-specific shocks. Larger, more productive firms return a larger share of rents to shareholders, while less productive firms endogenously exit. An increase in firm-level risk lowers the threshold at which firms exit and increases the measure of firms in the right tail of the size distribution, pushing up the aggregate capital share in the economy, but lowering the average firm's capital share. As predicted by the model, the increase in firm size inequality is not matched by an increase in inter-firm labor compensation inequality.

Sang Yoon Lee, the University of Mannheim, and Yongseok Shin, Washington University in St. Louis and NBER

Horizontal and Vertical Polarization: Task-Specific Technological Change in a Multi-Sector Economy

Lee and Shin analyze the effect of technological change on inequality using a novel framework that integrates an economy's skill distribution with its occupational and industrial structure. Individuals become a manager or a worker based on their managerial vs. worker skills, and workers further sort into a continuum of tasks (occupations) ranked by skill content. The researchers' theory dictates that faster technological progress for middle-skill tasks not only raises the employment shares and relative wages of lower- and higher-skill occupations (horizontal polarization among workers), but also raises those of managers over workers as a whole (vertical polarization). Both dimensions of polarization are faster within sectors that depend more on middle-skill tasks and less on managers. This endogenously leads to faster TFP growth among such sectors, whose employment and value-added shares shrink if sectoral goods are complementary (structural change). The researchers present several novel facts that support their model, followed by a quantitative analysis showing that task-specific technological progress — which was fastest for occupations embodying routine-manual tasks but not interpersonal skills — is important for understanding changes in the sectoral, occupational, and organizational structure of the U.S. economy since 1980, much more so than skill-biased and sector-specific technological changes.

Michael Gelman, the University of Michigan; Yuriy Gorodnichenko and Steven Tadelis, the University of California at Berkeley and NBER; Shachar Kariv and Dmitri Koustas, the University of California at Berkeley; Matthew Shapiro, the University of Michigan and NBER; and Dan Silverman, Arizona State University and NBER

The Response of Consumer Spending to Changes in Gasoline Prices (NBER Working Paper No. 22969)

Gelman, Gorodnichenko, Kariv, Koustas, Shapiro, and Silverman estimate how overall consumer spending responds to changes in gasoline prices. It uses the differential impact across consumers of the sudden, large drop in gasoline prices in 2014 for identification. This estimation strategy is implemented using comprehensive, daily transaction-level data for a large panel of individuals. The estimated marginal propensity to consume (MPC) is approximately one, a higher estimate than estimates found in less comprehensive or well-measured data. This estimate takes into account the elasticity of demand for gasoline and potential slow adjustment to changes in prices. The high MPC implies that changes in gasoline prices have large aggregate effects.

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