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Essays on Financial and Labor Markets with Frictions

Author : Feng Dong (Economist)

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Page : 160 pages

File Size : 36,56 MB

Release : 2014

Category : Electronic dissertations

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The dissertation, which consists of three chapters, is devoted to exploring financial and labor markets with frictions. Chapter I: Unemployment and Capital Misallocation. The recent recession was associated not only with a marked disruption in the credit market, but also a sharp deterioration in labor market conditions, as evidenced by high unemployment rates and an outward shift in the Beveridge curve. Motivated by such co-movements of the credit market and the labor market, in this chapter I develop a tractable dynamic model with heterogeneous entrepreneurs, credit constraints, and labor-search frictions. In this framework, the misallocation of capital across firms has an adverse effect on the matching efficiency in the labor market. I then quantify the importance of capital misallocation for understanding the behavior of unemployment rate. I find that the credit crunch was the key driving force behind the outward shift in the Beveridge curve during and after the Great Recession. More broadly, I find that credit market frictions and labor search frictions almost equally contributed to unemployment over all business cycles between 1951 and 2011. Chapter II: Asset Exchange with Search Frictions and Costly Information Acquisition. The second chapter presents a model to characterize conditions under which centralized and decentralized markets (CM/DM) co-exist for asset trading. The asset payoff and trading motive are the seller's private information. CM is immune to search frictions, but suffers from adverse selection. In contrast, DM is subject to search frictions, but it is sustainable since buyers acquire costly information on the asset payoff, and offer a trading menu different from that posted by uninformed buyers. As matching efficiency in the DM increases and the information cost decreases, more trade migrates from CM with adverse selection to DM with search frictions. In the limit, DM with search frictions converges to CM with complete information. I use the model to address the heterogeneous welfare effect of a government asset purchase programs like the Troubled Asset Relief Program (TARP). Chapter III: A Search-Based Theory of The Life-Cycle Pattern of Asset Holding. The third chapter investigates the implications of search frictions for a household's life cycle pattern of asset trading as well as for its size distribution in the OTC. General types of preferences are considered and the usual search-theoretic restriction of indivisibility on asset holding is removed. I employ the birth-and-death process to analytically characterize the non-stationary life-cycle pattern of asset holding by each cohort. In the presence of search frictions in the OTC, our paper predicts that the life cycle of asset holding by each cohort conforms to a geometric distribution while the size distribution of asset holding in each cross-section follows a logarithmic pattern. In the end, our model yields Gibrat's law for asset trading in the OTC.





Three Essays on the Role of Frictions in the Economy

Author : Meradj Morteza Pouraghdam

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Page : 165 pages

File Size : 49,28 MB

Release : 2016

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In this thesis I have investigated three aspects of market frictions. Chapter 1 is about financial frictions, i.e. frictional forces prevailing in the financial lending markets and how monitoring and legal fines imposed on banks affect financial fragility. Chapter 2 explores the frictional labor market, i.e. frictional forces that prevent the smooth matching process between employees and employers in labor markets. In this chapter I investigate the sources of fluctuations in labor market volatility. Chapter 3 investigates the asymmetrical information in lending markets and how bankruptcy law could potentially affect this asymmetrical information between a borrower and its lenders. In Chapter 1, I have investigated the implications of legal fines and partial monitoring in a macro-finance model. This primary motivation of this work was the unprecedented level of fines banks faced in recent years. The research in this field is very sparse and this work is one of the few to fill in the void. I have tried investigating the implications of fines and partial monitoring in static and dynamic frameworks. There is partial monitoring in the sense that dubious behavior of intermediaries is not always observed with certainty. Moreover intermediaries can pay some litigation fees to mitigate the punishment for their conduct should they get caught. Several insights can be drawn from introducing such concepts in static and dynamic frameworks. Partial monitoring and legal fines make the incentive constraint of intermediaries more relaxed, in the sense that bankers are required to pledge less collateral to raise fund. This decrease in the asset pledgeability pushes the corporate spread down. In a dynamic set-up due to changes in asset qualities caused by such possibilities, recovery in output and credit become sluggish in response to an adverse financial shock. The dynamic implications of the model for the post-crisis period are investigated. This paper calls for further research to broaden our understandings in how legal settlements interact with banks' behaviors. In Chapter 2 (joint with Elisa Guglielminetti) I have investigated the time-varying property of job creation in the United States. Despite extensive documentation of the US labor market dynamics, evidence on its time-varying volatility is very hard to find. In this work I contribute to the literature by structurally investigating the time-varying volatility of the U.S. labor market. I address this issue through a time-varying parameter VAR (TVP-VAR) with stochastic volatility by identifying four structural shocks through imposing robust restrictions based on a New Keynesian DSGE model with frictional labor markets and a large set of shocks. The main findings are as follows. First, at business cycle frequencies, the lion share of the variance of job creation is explained by cost-push and demand shocks, thus challenging the conventional practice of addressing the labor market volatility puzzle à la Shimer under the assumption that technology shocks are the main driver of fluctuations in hiring. Second, technology shocks had a negative impact on job creation until the beginning of the '90s. This result is reminiscent of the "hours puzzle" à la Gali. In Chapter 3 (joint with Garence Staraci) I provide an additional rationale why creditors include covenants in their contracts. The central claim is that covenants are not only included as a means of shifting the governance from debtors to creditors, but also to potentially address the concerns creditors might have about how the bankruptcy law is practiced. To investigate this claim, I take advantage of the fact that covenants are nullified inside bankruptcy. This fact permits us to show that any change to the bankruptcy law affects the spread through changes that it brings to the contractual structure...



Three Essays on Labor Market Frictions Under Firm Entry and Financial Business Cycles

Author : Jeremy Rastouil

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Page : 0 pages

File Size : 15,41 MB

Release : 2019

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During the Great Recession, the interactions between housing, labor and entry highlight the existence of narrow propagation channels between these markets. The aim of this thesis is to shed a light on labor market interactions with firm entry and financial business cycles, by building on the recent theoretical and empirical of DSGE models. In the first chapter, we have found evidence of the key role of the net entry as an amplifying mechanism for employment dynamics. Introducing search and matching frictions, we have studied from a new perspective the cyclicality of the mark-up compared to previous researches that use Walrasian labor market. We found a less countercyclical markup due to the acyclical aspect of the marginal cost in the DMP framework and a reduced role according to firm's entry in the cyclicality of the markup. In the second chapter, we have linked the borrowing capacity of households to their employment situation on the labor market. With this new microfoundation of the collateral constraint, new matches on the labor market translate into more mortgages, while separation induces an exclusion from financial markets for jobseekers. As a result, the LTV becomes endogenous by responding procyclically to employment fluctuations. We have shown that this device is empirically relevant and solves the anomalies of the standard collateral constraint. In the last chapter, we extend the analysis developed in the previous one by integrating collateral constrained firms in order to have a more complete financial business cycle. The first result is that an entrepreneur collateral constraint integrating capital, real commercial estate and wage bill in advance is empirically relevant compared to the collateral literature associated to the labor market which does not consider these three assets. The second finding is the role of the housing price and credit squeezes in the rise of the unemployment rate during the Great Recession. The last two chapters have important implications for economic policy. A structural deregulation reform in the labor market induces a significant rise in the debt level for households and housing price, combined with a substantial rise of firm debt. Our approach allows us to reveal that a macroprudential policy aiming to tighten the LTV ratio for household borrowers has positive effects in the long run for output and employment, while tightening LTV ratios for entrepreneurs leads to the opposite effect.



Essays on Labor Markets

Author : Sayoudh Roy

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Page : 0 pages

File Size : 17,85 MB

Release : 2021

Category : Frictional unemployment

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This thesis is a collection of three chapters that study various aspects of the labor force. The first two chapters study how labor markets respond to aggregate influences, when labor market frictions interact with other market features, and a third chapter that evaluates the impact of heterogeneity in households on interest rates. In the first two chapters, I focus on how the post-recession recovery of labor market variables is affected by imperfections in the market. The first chapter investigates the role of on-the-job search in the recovery process of employment, and how labor market power can suppress wages and incentivize against on-the-job search. Labor Market power allows a small number of firms to influence wages and employment in the market, and the suppression of wages persuades workers against expending costly search effort. The second chapter focuses on how the presence of financial frictions can affect the response of labor market variables in a frictional labor market. When bank liquidity is constrained in the event of a downturn, affecting the amount of loans available to firms, firms are unable to purchase the capital input they require to complement labor. This results in firms posting fewer vacancies, and a lower matching rate for workers, which hinders the recovery of employment. The third chapter introduces discount rate heterogeneity in Huggett (1993) and Aiyagari (1994) and evaluates the impact on interest rates.



Essays on Markets with Frictions

Author : Christoph Ungerer

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Page : pages

File Size : 24,92 MB

Release : 2012

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The classical treatment of market transactions in economics presumes that buyers and sellers engage in transactions instantly and at no cost. In a series of applications in the housing market, the labour market and the market for corporate bonds, this thesis shows that relaxing this assumption has important implications for Macroeconomics and Finance. The first chapter combines theory and empirical evidence to show that search frictions in the housing market imply a housing liquidity channel of monetary policy transmission. Expansionary monetary policy attracts buyers to the housing market, raising housing liquidity. Higher housing sale rates in turn allow lenders to threaten foreclosure more effectively, because the expected carrying costs on foreclosure inventory are lower. Ex-ante, this makes banks willing to offer larger loans, stimulating aggregate demand. The second chapter uses a heterogeneous firm industry model to explore how the macroeconomic response to a temporary employer payroll tax cut depends on the hiring and firing costs faced by firms. Controversially, the presence of non-convex labour adjustment costs suggests that tax cuts create fewer jobs in recessions. When firms hoard labour during downturns, they do not respond to marginal tax cuts by hiring additional workers. The third chapter develops a theory in which trader career concerns generate an endogenous transaction friction. Traders are reluctant to sell assets below historical purchase price, since realizing a loss signals to the employer that the trader is incompetent. The chapter documents empirically several properties of corporate bond transaction data consistent with this theory of career-concerned traders.



Essays on Firm Dynamics, Financial Frictions, and the Labor Market

Author : Dongchen Zhao

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Page : 0 pages

File Size : 45,44 MB

Release : 2023

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This dissertation consists of three chapters. The first chapter concerns the secular changes in the U.S. firm size distribution and firm dynamics. This chapter sets up a quantitative model of firm dynamics with debt heterogeneity to study the implications of changes in real interest rates for the firm size distribution and firm dynamics. It shows that the decline in long-term real interest rates since the early 1980s can account for a significant fraction of the shift in employment shares to large firms as well as the decline in firms per capita and firm entry rates experienced in the U.S. over the same period. In the model, firms endogenously choose financial intermediaries issuing debt with either earnings-based (EBC) or asset-based (ABC) borrowing constraints. The two types of constraints arise naturally from the imperfect enforceability of debt contracts and are in line with recent empirical findings. A decline in real interest rates benefits firms with EBC more because they are not constrained by their assets and can expand more due to increased earnings. Since firms with higher earnings optimally choose earnings-based lending, the decline in real interest rates shifts employment shares to larger firms. Moreover, the growth of large firms crowds out smaller firms and firm entry through general equilibrium effects. The paper tests the mechanism in cross-country data from the OECD and finds a stronger association between the decline in real interest rates and changes in firm dynamics, especially in countries with deeper credit markets. In the second chapter, I study the effects of government regulations on firm dynamism. The impact of government regulations on the economy is a central topic in policy debates. However, due to the endogeneity of regulations and challenges in measuring them, these debates remain contentious. This paper establishes the causal effects of government regulations on firm dynamism by employing a novel shift-share (Bartik) instrument in conjunction with the RegData dataset, which quantifies regulations based on the text of federal regulatory documents. The primary assumption for identification is that, for each sector, the exposure to regulations from different government agencies at the beginning of the period is exogenous to any confounding factors. The findings reveal that government regulatory restrictions significantly increase firm exit rates and discourage the formation of establishments, while having no substantial impact on firm entry. Furthermore, these restrictions contribute to reduced job creation, elevated job destruction, and diminished overall employment. These effects are consistently observed across various age groups. The results lend support to the idea that government regulations can raise production costs for firms and/or enhance the monopolistic power of certain companies. Both mechanisms can diminish the profits of affected firms, leading to increased firm exit rates and reduced labor demand. Additionally, the findings refute the interpretation of regulations as solely serving as entry barriers. The final chapter of the dissertation investigates the labor market outcomes for involuntary part-time workers and their subsequent effects on welfare levels. Through an analysis of survey data, I demonstrate that involuntary part-time workers exhibit reservation wages comparable to those of unemployed workers. This similarity largely stems from parallel wage offers and offer arrival rates. Contrary to previous research, this finding indicates that involuntary part-time workers experience welfare levels akin to unemployed workers. One possible explanation for this discrepancy lies in the methodology of prior studies. Conclusions drawn from earlier research, which primarily focused on the faster transition of involuntary part-time workers into full-time positions compared to other workers, may be flawed. This is because these workers also tend to revert to their previous job types at a faster rate. To further explore the implications of these discoveries, I employ a quantitative search model. The calibrated model supports the assertion that involuntary part-time workers experience welfare levels similar to those of unemployed workers. Furthermore, the model suggests that neither extending unemployment insurance to part-time workers nor enhancing the likelihood that unemployed workers transition to part-time positions would effectively increase the prevalence of full-time employment





Essays on Market Frictions, Economic Shocks and Business Fluctuations

Author : Seungho Nah

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Page : 129 pages

File Size : 14,13 MB

Release : 2010

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Abstract: In the first essay, 'Financial Frictions, Intersectoral Adjustment Costs, and News-Driven Business Cycles', I show that an RBC model with financial frictions and intersectoral adjustment costs can generate sizable boom-bust cycles and plausible responses of stock prices in response to a news shock. Booms in the labor market, which make it possible for both consumption and investment to increase in response to positive news, are caused through two channels: the increases in value of marginal product of labor and the increases in value of collateral. Both of these channels enable firms to hire more workers. Intersectoral adjustment costs contribute to both channels by increasing the relative price of output and capital during expansions. Financial frictions enter in the forms of collateral constraints on firms, which influence the latter channel, and the financial accelerator mechanism driven by agency costs, which amplifies all the key variables. My model differs from previous studies in its ability to generate boom-bust cycles without restricting the functional form of consumption in household preferences and without requiring investment adjustment costs, variable capital utilization, or any nominal rigidities. In the second essay, 'Financial and Real Frictions as Sources of Business Fluctuations', I show that a negative shock to a financial or real friction in an economy can generate quantitatively significant and persistent recessions, even without a decrease in exogenous aggregate total factor productivity in a heterogeneous agents DSGE model. The increase in uncertainty that a firm is facing when it makes capital adjustment, however, is found to have a limited or dubious influence on economic activities. The roles of collateral constaints as a financial friction and nonconvex capital adjustment costs as a real friction in aggregate fluctuations are examined in this propagation mechanism. When these frictions become strengthened, the degree of capital misallocation is intensified, which leads to a drop of endogenous aggregate total factor productivity. As agents expect that the return to investment and endogenous TFP decrease, they reduce aggregate investment sharply, which also leads to a drop in employment. Interruption of efficient resource allocation coming from these two frictions is found out to be enough to generate a large and persistent aggregate flucutations even without introducing heterogeneity in firm-level productivity.



Essays on Labor Market Frictions and Macroeconomic Welfare

Author : Guanyi Yang

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Page : 108 pages

File Size : 40,9 MB

Release : 2018

Category : Labor market

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Chapter 2 studies frictions in firm's hiring and firing decisions in an environment with dual labor markets. More firms execute employment decisions in two labor markets: a permanent (regular) market with firing costs and a frictionless temporary labor market. This paper studies the employment response of firms to heightened idiosyncratic risk and firing rigidity. Rising firing rigidity in the regular market and heightened risks reduce employment and output, which creates large welfare loss. By introducing a temporary labor market, firms switch from regular employment to temporary employment and reduce total employment loss. Thus, temporary employment creates a buffer for firms' employment decisions and for the economy's welfare. However, it cannot fully compensate the efficiency cost from rising firing cost and risk.