Essays on Firm Dynamics and Macroeconomics
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I describe two studies in firm dynamics and macroeconomics. Chapter 1 reports on the large decline in entrepreneurial activity that preceded and accompanied the Great Recession and proposes a model relating this decline to the housing collapse. The collapse in entrepreneurial activity coincided with a historic decline in home values that preceded the onset of the broad recession by at least nine months. I describe a heterogeneous agent general equilibrium model with both housing and entrepreneurship. The model is characterized by financial frictions that affect both credit supply and credit demand. I consider the consequences of a “housing crisis” as compared to a “financial crisis.” The model produces a negative response of entrepreneurship to a housing crisis via a housing collateral channel; this mechanism can account for at least a quarter of the empirical decline in entrepreneurs’ share of activity. A financial crisis (which works through credit supply) has more nuanced effects, causing economic disruption that entices new low-productivity entrepreneurs into production.
Chapter 2 describes a theory of endogenous firm-level risk over the business cycle based on endogenous firm market exposure. Firms that reach a larger number of markets diversify market-specific demand shocks at a cost. The model is driven only by total factor productivity shocks and captures the observed countercyclicality of firm-level risk. Consistent with the model, data from Compustat and the Longitudinal Business Database show that market reach is procyclical and that the countercyclicality of firm-level risk is driven mostly by those firms that adjust their market reach. This finding is explained by a negative elasticity between firm-level volatility and various measures of market exposure.