I explore the role of aggregate fluctuations as a persistent determinant of heterogeneity in firm-level markups. To analyze how business cycles generate dispersion in markups, I estimate the effects of aggregate conditions at key moments of firms' lives on the age profiles of markups for a sample of U.S. listed companies. Using the estimated markups, I calibrate a general equilibrium model that features heterogeneous product markets, customer base accumulation and firm dynamics. A novel feature of the model is that, in addition to making direct investments in customer acquisition, firms can accumulate customers by increasing sales, which is important to match the empirical findings. As the value of operating in each product market fluctuates endogenously with business cycles, aggregate conditions generate a selection on the product-market composition of firm cohorts that results in time-varying heterogeneity in product-market characteristics across active companies. This heterogeneity is persistent and can significantly affect both the response of the economy to future aggregate shocks and the co-movements of aggregate markups with output.
Rigidities in firms' payroll structures increase the pass-through of aggregate shocks to firms' fundamentals. By using rich Italian administrative data on worker careers and firms’ balance sheets, we study how the use of permanent and fixed-term labor contracts affects this pass-through. We document that firms use the contract composition of their workforce to manage the risk determined by their labor-induced operating leverage. First, we show that a higher labor share is associated with more volatile cash flows following unexpected real shocks, a manifestation of operating leverage through labor costs. Second, we show that firms with a greater share of temporary contracts are characterized by a lower variability of cash-flows and profits. This smoothing effect is stronger for firms with higher labor share related to the permanent workforce. We complement this analysis with the study of the 2001 labor market reform that lifted constraints on the creation of temporary contracts. We show that, following the staggered implementation of the reform, firms increased their share of temporary contracts and decreased average labor compensation. In addition, we show that, only among firms with an ex-ante more rigid labor cost structure, the earlier transition to a more flexible workforce composition led to a sizable increase in profit margins and a decrease in the cross-sectional standard deviation of profits.
Evaluating the allocative effects of recessions is challenging due to the dynamic and jointly evolving distributions of workers and firms. Workers constantly gain or lose human capital, while the landscape of firms shifts with cyclical vacancy posting, entry and exit. We build a search model with aggregate risk and worker-firm heterogeneity, in which human capital accumulation depends on the sorting of workers to firms. The framework allows us to account for how workers' skills and firms' distributions jointly vary with and in turn impact business cycles. We estimate the model on administrative data and show that persistent negative effects on the productivity of worker-firm matches dominate cleansing effects, with distortions in sorting and human capital accumulation accounting for approximately 60% of cumulative output losses. Our model offers a rationale for the increased length of recessions and their heterogeneous welfare effects across age, income, and human capital distributions.
Work in Progress
The public and private debt channel of monetary policy
Free manuals and productivity
This note considers the possible productivity effect of the vast amount of free answers to coding questions available online, a phenomenon we term manuals. Large parts of the manual production are the result of non-pecuniary motives, e.g. warm glow and social recognition. Developers take the time to answer detailed programming questions online and their answers are freely accessible. Different users than those who had originally asked the questions search and find the answers on a daily basis when they have to solve similar problems in their work. The re-use component of answers is very substantial. Up to 2018, there were around 17 million questions on today’s most popular website. These questions and their answers have been been viewed around 39 billion times over the same time span. Unlike patents or other measures of technological progress, most of such manuals has no proprietary rights or price. To motivate our analysis, we first establish that historical use of programming alone is a surprisingly competitive predictor of recent regional US economic growth, also when additionally controlling for historical IT investment or education. We then document the frequent use of manuals by programmers and look into the social norms which drive their wide-spread provision. A stylized model depicts manuals and new functionalities in programming languages as being close to perfect complements in a production function: The economy could not leverage the productivity of new programming functionalities close to as quickly without the widespread norms that generate the required manuals almost simultaneously.