Working Papers
Abstract: How does venture capital (VC) financing help the growth of startup firms and impact aggregate output and consumption? Motivated by the substantial growth and upfront investment of VC-backed firms observed in administrative US Census data, this paper develops a firm dynamics model over the life cycle that centers on ex-ante heterogeneity in growth potential, innovation investment, and external financing. In the model, startups choose the source of financing from VC, Angel investors, and banks, where financial frictions arise from bank default costs and costs of raising equity. VC-backed firms achieve substantial growth as a result of endogenous sorting, equity-based funding, and managerial advice. The calibrated model implies that venture capitalists' advice accounts for around 22% of the growth of VC-backed firms. A counterfactual economy without VC financing would lose aggregate consumption by around 0.4%.
Abstract: In this paper, we study the neoclassical growth model with idiosyncratic income risk and aggregate risk in which risk sharing is endogenously constrained by one-sided limited commitment. Households can trade a full set of contingent claims that pay off depending on both idiosyncratic and aggregate risk, but limited commitment rules out that households sell these assets short. The model results, under suitable restrictions of the parameters of the model, in partial consumption insurance in equilibrium. With log-utility and idiosyncratic income shocks taking two values, one of which is zero (e.g., employment and unemployment), we show that the equilibrium can be characterized in closed form, despite the fact that it features a non-degenerate consumption and wealth distribution. We use the tractability of the model to study, analytically, inequality over the business cycle and asset pricing, and derive conditions under which our model has identical, as well as conditions under which it has lower/higher risk premia than the corresponding representative agent version of the model.
(with Emin Dinlersoz, Jeremy Greenwood, and Ruben Piazzesi)
Abstract: The adoption of advanced technologies has important implications for employment and growth. The analysis of firm-level data from US Census Bureau indicates that firms with advanced technologies are disproportionately backed by venture capital (VC). While both advanced technology use and VC backing separately matter significantly for firm outcomes, VC backing has a larger effect on firms with advanced technology. A model of startups is constructed featuring decisions to use advanced technology and VC. The model is matched up with facts about firms' employment, technology use, and VC reliance. The implications of business taxation and subsidies are studied, and the significance of the availability of advanced technology and VC in the economy is quantified.
Work in Progress
"The Rise of Technological Rivalry" (draft upon request)
(with James Bessen and Xiupeng Wang)
Abstract: Rival firms’ R&D can increase obsolescence risk, thereby reducing a firm’s expected rents from innovation. This paper estimates a novel measure of the impact of rivals’ R&D on firms’ own innovation investments, revealing that this form of “Creative Destruction” is substantial and has doubled since the late 1970s. The increase corresponds to a more than doubling of obsolescence rates, implying that net R&D in the economy has grown little. We find that higher obsolescence also raises markups and slows firm growth, especially for more productive firms. Rising rivalry accounts for most of the decline in job reallocation measured in Decker et al. (2020). This, in turn, contributes to slower aggregate productivity growth. The link between Creative Destruction and productivity growth appears multi-sided.