Working Papers
Market Power and Innovation in the Intangible Economy
Cambridge INET working paper and Centre for Macroeconomics Discussion Paper- March 2019
Abstract: This paper argues that the rise of intangible inputs (such as information technology) can cause a slowdown of growth through the effect it has on production and competition. I hypothesize that intangibles create a shift from variable costs to endogenous fixed costs, and use a new measure to show that the share of fixed costs in total costs rises when firms increase ICT and software investments. I then develop a quantitative framework in which intangibles reduce marginal costs (and endogenously raise fixed costs), which gives firms with low adoption costs a competitive advantage. This advantage can be used to deter other firms from entering new markets and from developing higher quality products. Paradoxically, the presence of firms with high levels of intangibles can therefore reduce the rate of creative destruction and innovation. I calibrate the model using administrative data on the universe of French firms and find that, after initially boosting productivity, the rise of intangibles causes a 0.6 percentage point decline in long-term productivity growth. The model further predicts a decline in business dynamism, a fall in the labor share and an increase in markups, though markups overstate the increase in firm profits.
Intangible Investment and the Persistent Effect of Financial Crises on Output
Revise and Resubmit at The Economic Journal. Cambridge INET working paper, September 2016 - Updated January 2018
Abstract: This paper identifies the mechanism through which financial crises exert long-term negative effects on output. Theory suggests that a shortfall in productivity-enhancing investments temporarily slows technological progress, creating a gap between pre-crisis trend and actual GDP. This hypothesis is tested using a linked lender-borrower dataset on 522 U.S. corporations responsible for 58% of industrial research and development. Exploiting exogenous variation in firm-level exposure to the Global Financial Crisis, I show that tight credit reduced investments in productivity-enhancement, and significantly slowed down output growth between 2010 and 2015. A partial-equilibrium aggregation exercise suggests GDP would be at least 3.2% higher today if productivity-enhancing investments had grown at pre-crisis rates.
Policy Shocks and Wage Rigidities: Empirical Evidence from the Regional Effect of National Shocks
Cambridge INET working paper, April 2017 (with Damjan Pfajfar, Federal Reserve Board). Submitted.
Abstract: This paper studies the effect of wage rigidities on the transmission of fiscal and monetary policy shocks. We calculate downward wage rigidities across U.S. states using the Current Population Survey. These estimates are used to explain differences in the state-level economic effects of identical national shocks in interest rates and taxes. In line with the role of sticky wages in New Keynesian models, we find that contractionary monetary policy and tax shocks increase unemployment and decrease economic activity in rigid states considerably more than in flexible states. We also find larger and more persistent effects of monetary and tax policy shocks for states where the ratio between minimum and median wage is higher and for states that do not have right-to-work legislation.
* forthcoming
Cambridge INET working paper and Centre for Macroeconomics Discussion Paper- March 2019
Abstract: This paper argues that the rise of intangible inputs (such as information technology) can cause a slowdown of growth through the effect it has on production and competition. I hypothesize that intangibles create a shift from variable costs to endogenous fixed costs, and use a new measure to show that the share of fixed costs in total costs rises when firms increase ICT and software investments. I then develop a quantitative framework in which intangibles reduce marginal costs (and endogenously raise fixed costs), which gives firms with low adoption costs a competitive advantage. This advantage can be used to deter other firms from entering new markets and from developing higher quality products. Paradoxically, the presence of firms with high levels of intangibles can therefore reduce the rate of creative destruction and innovation. I calibrate the model using administrative data on the universe of French firms and find that, after initially boosting productivity, the rise of intangibles causes a 0.6 percentage point decline in long-term productivity growth. The model further predicts a decline in business dynamism, a fall in the labor share and an increase in markups, though markups overstate the increase in firm profits.
Intangible Investment and the Persistent Effect of Financial Crises on Output
Revise and Resubmit at The Economic Journal. Cambridge INET working paper, September 2016 - Updated January 2018
Abstract: This paper identifies the mechanism through which financial crises exert long-term negative effects on output. Theory suggests that a shortfall in productivity-enhancing investments temporarily slows technological progress, creating a gap between pre-crisis trend and actual GDP. This hypothesis is tested using a linked lender-borrower dataset on 522 U.S. corporations responsible for 58% of industrial research and development. Exploiting exogenous variation in firm-level exposure to the Global Financial Crisis, I show that tight credit reduced investments in productivity-enhancement, and significantly slowed down output growth between 2010 and 2015. A partial-equilibrium aggregation exercise suggests GDP would be at least 3.2% higher today if productivity-enhancing investments had grown at pre-crisis rates.
- Media Coverage: Mejudice, The Guardian, VoxEU, Wall Street Journal, Financial Times, ECB Vice-President's Remarks
- Presentations: U. of Cambridge; CPB Netherlands; Tilburg U.; De Nederlandsche Bank; U. of Oxford, Federal Reserve Board; 7th CESIfo Conference on Survey Data and Macroeconomics; Joint CEPR, Bank of England, CFM, BHC Workshop on Finance, Investment and Productivity; Royal Economy Society 2017; BGSE Summer Forum: Firms in the Global Economy; ECB Forum on Central Banking (poster); 5th ECB/CBRT Joint Conference
- Awards: CERF Cambridge Best Student Finance Paper (2018), shortlisted for ECB's Young Economist Award (2017)
Policy Shocks and Wage Rigidities: Empirical Evidence from the Regional Effect of National Shocks
Cambridge INET working paper, April 2017 (with Damjan Pfajfar, Federal Reserve Board). Submitted.
Abstract: This paper studies the effect of wage rigidities on the transmission of fiscal and monetary policy shocks. We calculate downward wage rigidities across U.S. states using the Current Population Survey. These estimates are used to explain differences in the state-level economic effects of identical national shocks in interest rates and taxes. In line with the role of sticky wages in New Keynesian models, we find that contractionary monetary policy and tax shocks increase unemployment and decrease economic activity in rigid states considerably more than in flexible states. We also find larger and more persistent effects of monetary and tax policy shocks for states where the ratio between minimum and median wage is higher and for states that do not have right-to-work legislation.
* forthcoming
