Customer Capital, Markup Cyclicality, and Amplification
Abstract: This paper studies the importance of firm-level price-markup dynamics for business cycle fluctuations. Using state-of-the-art IO techniques to measure the behavior of markups over the business cycle at the firm level, I find that markups are counter-cyclical with an average elasticity of -1.1 with respect to real GDP. Importantly, I find substantial heterogeneity in markup cyclicality across firms, with small firms having significantly more counter-cyclical markups than large firms. Then, I develop a general equilibrium model by embedding customer capital (due to deep habits as in Ravn, Schmitt-Grohe, and Uribe, 2006) into a standard Hopenhayn (1992) model of firm dynamics with entry and exit. The calibrated model replicates these empirical facts and produces counter-cyclical firm sales dispersions consistent with the data. The resulting input misallocation amplifies both the volatility and persistence of the aggregate productivity shocks driving the business cycle.
Capital Gains Taxation and Investment Dynamics (with Terry S. Moon)
Abstract: This paper quantifies the long-run effects of reducing capital gains taxes on aggregate investment. We develop a dynamic general equilibrium model with heterogeneous firms, which face discrete capital gains tax rates based on their firm size. We calibrate our model by targeting relevant micro moments as well as the difference-in-differences estimate of the capital elasticity based on the institutional setting and a policy reform in Korea. We find that the firm-size reform that reduced the capital gains tax rates from 24 percent to 10 percent for the affected firms increased aggregate investment by 2.6 percent and 1.7 percent in the short-run and in the steady state, respectively. Additionally, in a counterfactual analysis where we set the uniformly low tax rate of 10 percent, the aggregate investment rose by 6.8 percent in the long-run. Taken together, our findings suggest that reducing capital gains tax rates would substantially increase investment in the short-term, and accounting for dynamic and general equilibrium responses is important for understanding the aggregate effects of capital gains taxes.
Works in Progress:
Quantifying Firm Concentration (with John Kim)