Publications
"SME Failures Under Large Liquidity Shocks: An Application to the COVID-19 Crisis", Accepted at the Journal of the European Economic Association.
with Pierre Olivier Gourinchas, Sebnem Kalemli-Ozcan, and Nick Sander.
(Draft previously circulated under the titles: COVID-19 and SME Failures & Estimating SME Failures in Real Time:
An Application to the COVID-19 Crisis)
Abstract: We study the effects of financial frictions on firm exit when firms face large liquidity shocks. We develop a simple model of firm cost-minimization, where firms’ borrowing capacity to smooth temporary shocks to liquidity is limited. In this framework, firm exit arises from the interaction between this financial friction and fluctuations in cash flow due to aggregate and sectoral changes in demand conditions, as well as more traditional shocks to productivity. To evaluate the implications of our model, we use firm level data on small and medium sized enterprises (SMEs) in 11 European countries. We confirm that our framework is consistent with official failure rates in 2017-2019, a period characterized by standard business cycle fluctuations in demand. To capture a large liquidity shock, we apply our framework to the COVID-19 crisis. We find that, absent government support, SME failure rates would have increased by 6.01 percentage points, putting 3.1 percent of employment at risk. Our results also show that in the presence of financial frictions and in the absence of government support, the firms failing due to COVID have similar productivity and growth to firms that survive COVID.
Coverage:
"Synergizing Ventures," Journal of Economic Dynamics and Control, Volume 143, October 2022, 104427.
with Ufuk Akcigit, Emin Dinlersoz, and Jeremy Greenwood.
Abstract: Venture capital and growth are examined both empirically and theoretically. Empirically, VC-backed startups have higher early growth rates and patenting levels than non-VC backed ones. Venture capitalists increase a startup's likelihood of reaching the right tails of the firm size and innovation distributions. Furthermore, outcomes are better for startups matched with more experience venture capitalists. An endogenous growth model, where venture capitalists provide both expertise and financing for business startups, is constructed to match these facts. The presence of venture capital, the degree of assortative matching between startups and financiers, and the taxation of VC-backed startups matter significantly for growth.
Coverage:
"Business Formation: A Tale of Two Recessions," Prepared for AER: Papers & Proceedings, May 2021.
with Emin Dinlersoz, Timothy Dunne, and John Haltiwanger.
Note: Papers & Proceedings volumes are not peer reviewed.
Abstract: The trajectory of new business applications and transitions to employer businesses differ markedly during the Great Recession and COVID-19 Recession. Both applications and transitions to employer startups decreased slowly but persistently in the post-Lehman period of the Great Recession. In contrast, during COVID-19 new applications initially declined but have since sharply rebounded, resulting in a surge in applications during 2020. Projected transitions to employer businesses also rise, but this is dampened by a change in the composition of applications towards applications that are more likely to remain nonemployers.
"COVID-19 and SMEs A 2021 "Time Bomb"?" Prepared for AER: Papers & Proceedings, May 2021.
with Pierre Olivier Gourinchas, Sebnem Kalemli-Ozcan, and Nick Sander.
Note: Papers & Proceedings volumes are not peer reviewed.
Abstract: This paper assesses the prospects of a 2021 time bomb in SME failures triggered by the generous support policies enacted during the 2020 COVID-19 crisis. Policies implemented in 2020, on their own, do not create a 2021 ``time-bomb'' for SMEs. Rather, business failures and policy costs remain modest. By contrast, credit contraction poses significant risk. Such a contraction would disproportionately impact firms that could survive COVID-19 in 2020 without fiscal support. Even in that scenario, most failures would not arise from excessively generous 2020 policies, but rather from the contraction of credit to the corporate sector.
"Fiscal Policy in the Age of COVID: Does it `Get in All of the Cracks?'," Jackson Hole Symposium Proceedings, 2021.
with Pierre Olivier Gourinchas, Sebnem Kalemli-Ozcan, and Nick Sander.
Note: Jackson Hole Symposium Proceedings are not peer reviewed.
Abstract: We study the effects of fiscal policy in response to the COVID-19 pandemic at the firm, sector, country and global level. First, we estimate the impact of COVID-19 and policy responses on small and medium sized enterprise (SME) business failures. We combine firm-level financial data from 50 sectors in 27 countries, a detailed I-O network, real-time data on lockdown policies and mobility patterns, and a rich model of firm behavior that allows for several dimensions of heterogeneity. We find: (a) Absent government support, the failure rate of SMEs would have increased by 9 percentage points, significantly more so in emerging market economies (EMs). With policy support it only increased by 4.3 percentage points, and even decreased in advanced economies (AEs). (b) Fiscal policy was poorly targeted: most of the funds disbursed went to firms who did not need it. (c) Nevertheless, we find little evidence of the policy merely postponing mass business failures or creating many ‘zombie’ firms: failure rates rise only slightly in 2021 once policy support is removed. Next, we build a tractable global intertemporal general equilibrium I-O model with fiscal policy. We calibrate the model to 64 countries and 36 sectors. We find that: (d) a sizable share of the global economy is demand-constrained under COVID-19, especially so in EMs. (e) Globally, fiscal policy helped offset about 8% of the downturn in COVID, with a low ‘traditional’ fiscal multiplier. Yet it significantly reduced the share of demand-constrained sectors, preserving employment in these sectors. (f) Fiscal policy exerted small and negative spillovers to output in other countries but positive spillovers on employment. (g) A two-speed recovery would put significant upwards pressure on global interest rates which imposes an additional headwind on the EM recovery.(h) Corporate and sovereign spreads rise when global rates increase, suggesting that EM may face challenging external funding conditions as AEs economies normalize.
with Pierre Olivier Gourinchas, Sebnem Kalemli-Ozcan, and Nick Sander.
(Draft previously circulated under the titles: COVID-19 and SME Failures & Estimating SME Failures in Real Time:
An Application to the COVID-19 Crisis)
Abstract: We study the effects of financial frictions on firm exit when firms face large liquidity shocks. We develop a simple model of firm cost-minimization, where firms’ borrowing capacity to smooth temporary shocks to liquidity is limited. In this framework, firm exit arises from the interaction between this financial friction and fluctuations in cash flow due to aggregate and sectoral changes in demand conditions, as well as more traditional shocks to productivity. To evaluate the implications of our model, we use firm level data on small and medium sized enterprises (SMEs) in 11 European countries. We confirm that our framework is consistent with official failure rates in 2017-2019, a period characterized by standard business cycle fluctuations in demand. To capture a large liquidity shock, we apply our framework to the COVID-19 crisis. We find that, absent government support, SME failure rates would have increased by 6.01 percentage points, putting 3.1 percent of employment at risk. Our results also show that in the presence of financial frictions and in the absence of government support, the firms failing due to COVID have similar productivity and growth to firms that survive COVID.
Coverage:
"Synergizing Ventures," Journal of Economic Dynamics and Control, Volume 143, October 2022, 104427.
with Ufuk Akcigit, Emin Dinlersoz, and Jeremy Greenwood.
Abstract: Venture capital and growth are examined both empirically and theoretically. Empirically, VC-backed startups have higher early growth rates and patenting levels than non-VC backed ones. Venture capitalists increase a startup's likelihood of reaching the right tails of the firm size and innovation distributions. Furthermore, outcomes are better for startups matched with more experience venture capitalists. An endogenous growth model, where venture capitalists provide both expertise and financing for business startups, is constructed to match these facts. The presence of venture capital, the degree of assortative matching between startups and financiers, and the taxation of VC-backed startups matter significantly for growth.
Coverage:
"Business Formation: A Tale of Two Recessions," Prepared for AER: Papers & Proceedings, May 2021.
with Emin Dinlersoz, Timothy Dunne, and John Haltiwanger.
Note: Papers & Proceedings volumes are not peer reviewed.
Abstract: The trajectory of new business applications and transitions to employer businesses differ markedly during the Great Recession and COVID-19 Recession. Both applications and transitions to employer startups decreased slowly but persistently in the post-Lehman period of the Great Recession. In contrast, during COVID-19 new applications initially declined but have since sharply rebounded, resulting in a surge in applications during 2020. Projected transitions to employer businesses also rise, but this is dampened by a change in the composition of applications towards applications that are more likely to remain nonemployers.
"COVID-19 and SMEs A 2021 "Time Bomb"?" Prepared for AER: Papers & Proceedings, May 2021.
with Pierre Olivier Gourinchas, Sebnem Kalemli-Ozcan, and Nick Sander.
Note: Papers & Proceedings volumes are not peer reviewed.
Abstract: This paper assesses the prospects of a 2021 time bomb in SME failures triggered by the generous support policies enacted during the 2020 COVID-19 crisis. Policies implemented in 2020, on their own, do not create a 2021 ``time-bomb'' for SMEs. Rather, business failures and policy costs remain modest. By contrast, credit contraction poses significant risk. Such a contraction would disproportionately impact firms that could survive COVID-19 in 2020 without fiscal support. Even in that scenario, most failures would not arise from excessively generous 2020 policies, but rather from the contraction of credit to the corporate sector.
"Fiscal Policy in the Age of COVID: Does it `Get in All of the Cracks?'," Jackson Hole Symposium Proceedings, 2021.
with Pierre Olivier Gourinchas, Sebnem Kalemli-Ozcan, and Nick Sander.
Note: Jackson Hole Symposium Proceedings are not peer reviewed.
Abstract: We study the effects of fiscal policy in response to the COVID-19 pandemic at the firm, sector, country and global level. First, we estimate the impact of COVID-19 and policy responses on small and medium sized enterprise (SME) business failures. We combine firm-level financial data from 50 sectors in 27 countries, a detailed I-O network, real-time data on lockdown policies and mobility patterns, and a rich model of firm behavior that allows for several dimensions of heterogeneity. We find: (a) Absent government support, the failure rate of SMEs would have increased by 9 percentage points, significantly more so in emerging market economies (EMs). With policy support it only increased by 4.3 percentage points, and even decreased in advanced economies (AEs). (b) Fiscal policy was poorly targeted: most of the funds disbursed went to firms who did not need it. (c) Nevertheless, we find little evidence of the policy merely postponing mass business failures or creating many ‘zombie’ firms: failure rates rise only slightly in 2021 once policy support is removed. Next, we build a tractable global intertemporal general equilibrium I-O model with fiscal policy. We calibrate the model to 64 countries and 36 sectors. We find that: (d) a sizable share of the global economy is demand-constrained under COVID-19, especially so in EMs. (e) Globally, fiscal policy helped offset about 8% of the downturn in COVID, with a low ‘traditional’ fiscal multiplier. Yet it significantly reduced the share of demand-constrained sectors, preserving employment in these sectors. (f) Fiscal policy exerted small and negative spillovers to output in other countries but positive spillovers on employment. (g) A two-speed recovery would put significant upwards pressure on global interest rates which imposes an additional headwind on the EM recovery.(h) Corporate and sovereign spreads rise when global rates increase, suggesting that EM may face challenging external funding conditions as AEs economies normalize.
Working Papers
"Political Connections, Allocation of Stimulus Spending, and the Jobs Multiplier," March 2024.
with Joonkyu Choi and Felipe Saffie.
Abstract: We study the role of firms' political influence on the effectiveness of government spending using ARRA as a laboratory. Through an instrumental variable approach, we show that a 10 percentage points increase in the share of politically connected spending lowers the job creation effect of stimulus by 33 percent at the state level. We exploit ex-post close state-level elections to establish that firms that contributed to winning candidates create fewer jobs after winning grants. Using a quantitative general equilibrium model, we show that politically connected spending also lowers the aggregate jobs multiplier, and that the dampening effect is rationalized by connected firms charging higher markups.
"Unemployment Benefits Expansion and Business Formation," March 2024.
with Joonkyu Choi, Michael Navarrete, and Samuel Messer.
Abstract: New business formation surged after the pandemic recession, but its causes are not well understood. In this paper, we provide evidence that unemployment insurance (UI) expansion contributed to the rise in business creation. The expansion of UI benefits under the CARES Act, coupled with the relaxation of work search requirements under FFCRA, provided unemployed potential entrepreneurs with the funds and time needed to develop business ideas. To identify the causal effect of UI benefits expansion on business formation, we exploit the fact that the variation across states in the increase in UI payments per unemployed was partly due to some states’ reliance on an outdated technology, COBOL, to process UI claims. Using an instrumented difference-in-difference design, we estimate that a one percent increase in UI benefits per unemployed led to a 0.24 percent increase in new business applications. This estimate implies that more than half of the observed rise in business formation in 2020 can be attributed to the UI expansion. Our findings highlight the potential role of UI policy in contributing to economic recoveries by fostering entrepreneurship.
"Local Origins of Business Formation," November 2023.
with Emin Dinlersoz, Timothy Dunne, and John Haltiwanger.
(Draft also available as CES Working Paper 23-34 and Federal Reserve Bank of Atlanta Working Paper Series 2023-9)
Abstract: What locations generate more business ideas, and where are ideas more likely to turn into businesses? Using comprehensive administrative data on business applications, we analyze the spatial disparity in the creation of business ideas and the formation of new employer startups from these ideas. Startups per capita exhibit enormous variation across granular units of geography. We decompose this variation into variation in ideas per capita and in their rate of transition to startups, and find that both components matter. Observable local demographic, economic, financial, and business conditions accounts for a significant fraction of the variation in startups per capita, and more so for the variation in ideas per capita than in transition rate. Income, education, age, and foreign-born share are generally strong positive correlates of both idea generation and transition. Overall, the relationship of local conditions with ideas differs from that with transition rate in magnitude, and sometimes, in sign: certain conditions (notably, the African-American share of the population) are positively associated with ideas, but negatively with transition rates. We also find a close correspondence between the actual rank of locations in terms of startups per capita and the predicted rank based only on observable local conditions -- a result useful for characterizing locations with high startup activity.
"Leverage over the Firm Life-Cycle, Firm Growth, and Aggregate Fluctuations," NBER Working Paper No. 25226, September 2019.
with Emin Dinlersoz, Henry Hyatt, and Sebnem Kalemli-Ozcan (New Draft Coming Soon)
Abstract: We study the leverage of U.S. firms over their life-cycles, and the connection between firm leverage, firm growth, and aggregate shocks. We construct a new data set that combines private and public firms' balance sheets with firm-level data from the U.S. Census Bureau's Longitudinal Business Database (LBD) for the period 2005-2012. Public and private firms exhibit different leverage dynamics over their life-cycles. Firm and and size are systematically related to leverage for private firms, but not for public firms. We show that private firms, but not public ones, deleveraged during the Great Recession, and that this deleveraging is associated with a reduction in firm revenue and employment growth. Exploiting sectoral variation, we find that the leverage dynamics of firms is also relevant for aggregate fluctuations.
Coverage:
"Diversification and Risky Innovation among U.S. Firms," December 2018.
Abstract: Risky innovation contributes disproportionately to aggregate growth. I make use of a unique data set that combines ownership data for a sample of U.S. firms with the Census Bureau's Longitudinal Business Database, patenting data, and Compustat to study whether firms held by owners with more diversified business interests engage in riskier innovation. I document that higher owner diversification leads to riskier innovation within firms over time, after holding constant firm life cycle characteristics, access to finance, other features of the firm ownership structure, and time invariant firm and owner characteristics. Consistent with the risk-sharing channel, the results are strongest among firms held by owners who are most exposed to firm-specific risk. The results are also found at the sector level, with sectors characterized by higher diversification exhibiting higher risky innovation, revenue, and growth. I present a stylized model that rationalizes these empirical findings.
with Joonkyu Choi and Felipe Saffie.
Abstract: We study the role of firms' political influence on the effectiveness of government spending using ARRA as a laboratory. Through an instrumental variable approach, we show that a 10 percentage points increase in the share of politically connected spending lowers the job creation effect of stimulus by 33 percent at the state level. We exploit ex-post close state-level elections to establish that firms that contributed to winning candidates create fewer jobs after winning grants. Using a quantitative general equilibrium model, we show that politically connected spending also lowers the aggregate jobs multiplier, and that the dampening effect is rationalized by connected firms charging higher markups.
"Unemployment Benefits Expansion and Business Formation," March 2024.
with Joonkyu Choi, Michael Navarrete, and Samuel Messer.
Abstract: New business formation surged after the pandemic recession, but its causes are not well understood. In this paper, we provide evidence that unemployment insurance (UI) expansion contributed to the rise in business creation. The expansion of UI benefits under the CARES Act, coupled with the relaxation of work search requirements under FFCRA, provided unemployed potential entrepreneurs with the funds and time needed to develop business ideas. To identify the causal effect of UI benefits expansion on business formation, we exploit the fact that the variation across states in the increase in UI payments per unemployed was partly due to some states’ reliance on an outdated technology, COBOL, to process UI claims. Using an instrumented difference-in-difference design, we estimate that a one percent increase in UI benefits per unemployed led to a 0.24 percent increase in new business applications. This estimate implies that more than half of the observed rise in business formation in 2020 can be attributed to the UI expansion. Our findings highlight the potential role of UI policy in contributing to economic recoveries by fostering entrepreneurship.
"Local Origins of Business Formation," November 2023.
with Emin Dinlersoz, Timothy Dunne, and John Haltiwanger.
(Draft also available as CES Working Paper 23-34 and Federal Reserve Bank of Atlanta Working Paper Series 2023-9)
Abstract: What locations generate more business ideas, and where are ideas more likely to turn into businesses? Using comprehensive administrative data on business applications, we analyze the spatial disparity in the creation of business ideas and the formation of new employer startups from these ideas. Startups per capita exhibit enormous variation across granular units of geography. We decompose this variation into variation in ideas per capita and in their rate of transition to startups, and find that both components matter. Observable local demographic, economic, financial, and business conditions accounts for a significant fraction of the variation in startups per capita, and more so for the variation in ideas per capita than in transition rate. Income, education, age, and foreign-born share are generally strong positive correlates of both idea generation and transition. Overall, the relationship of local conditions with ideas differs from that with transition rate in magnitude, and sometimes, in sign: certain conditions (notably, the African-American share of the population) are positively associated with ideas, but negatively with transition rates. We also find a close correspondence between the actual rank of locations in terms of startups per capita and the predicted rank based only on observable local conditions -- a result useful for characterizing locations with high startup activity.
"Leverage over the Firm Life-Cycle, Firm Growth, and Aggregate Fluctuations," NBER Working Paper No. 25226, September 2019.
with Emin Dinlersoz, Henry Hyatt, and Sebnem Kalemli-Ozcan (New Draft Coming Soon)
Abstract: We study the leverage of U.S. firms over their life-cycles, and the connection between firm leverage, firm growth, and aggregate shocks. We construct a new data set that combines private and public firms' balance sheets with firm-level data from the U.S. Census Bureau's Longitudinal Business Database (LBD) for the period 2005-2012. Public and private firms exhibit different leverage dynamics over their life-cycles. Firm and and size are systematically related to leverage for private firms, but not for public firms. We show that private firms, but not public ones, deleveraged during the Great Recession, and that this deleveraging is associated with a reduction in firm revenue and employment growth. Exploiting sectoral variation, we find that the leverage dynamics of firms is also relevant for aggregate fluctuations.
Coverage:
"Diversification and Risky Innovation among U.S. Firms," December 2018.
Abstract: Risky innovation contributes disproportionately to aggregate growth. I make use of a unique data set that combines ownership data for a sample of U.S. firms with the Census Bureau's Longitudinal Business Database, patenting data, and Compustat to study whether firms held by owners with more diversified business interests engage in riskier innovation. I document that higher owner diversification leads to riskier innovation within firms over time, after holding constant firm life cycle characteristics, access to finance, other features of the firm ownership structure, and time invariant firm and owner characteristics. Consistent with the risk-sharing channel, the results are strongest among firms held by owners who are most exposed to firm-specific risk. The results are also found at the sector level, with sectors characterized by higher diversification exhibiting higher risky innovation, revenue, and growth. I present a stylized model that rationalizes these empirical findings.
Work in Progress
"Carcinogens Exposure and Firm Response to Cash Flow Risk," with Austin Starkweather
“The Rise of Superstar Firms through Human Capital Reallocation,” with Jan Bena, Nathan Goldschlag, Xiyue Li, and Elena Simintzi.
“The Rise of Superstar Firms through Human Capital Reallocation,” with Jan Bena, Nathan Goldschlag, Xiyue Li, and Elena Simintzi.