Creator: Aiyagari, S. Rao Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 376 Abstract:
We describe a simple environment in which assets of varying qualities may be used for transactions and consumption. The quality of an asset is known to the seller but not the buyer. We show that this feature can generate a negative relationship between the transactions velocities of assets and their rates of return. We also discuss several versions of Gresham's Law which hold in this environment.
Keyword: Consumption, Asset quality, Transactions, and Gresham's Law Subject (JEL): E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
Creator: Luttmer, Erzo G. J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 440 Abstract:
The Pareto-like tail of the size distribution of firms can arise from random growth of productivity or stochastic accumulation of capital. If the shocks that give rise to firm growth are perfectly correlated within a firm, then the growth rates of small and large firms are equally volatile, contrary to what is found in the data. If firm growth is the result of many independent shocks within a firm, it can take hundreds of years for a few large firms to emerge. This paper describes an economy with both types of shocks that can account for the thick-tailed firm size distribution, high entry and exit rates, and the relatively young age of large firms. The economy is one in which aggregate growth is driven by the creation of new products by both new and incumbent firms. Some new firms have better ideas than others and choose to implement those ideas at a more rapid pace. Eventually, such firms slow down when the quality of their ideas reverts to the mean. As in the data, average growth rates in a cross section of firms will appear to be independent of firm size, for all but the smallest firms.
Keyword: Firm size distribution, Gibrat’s law, and Aggregate growth Subject (JEL): L10 - Market Structure, Firm Strategy, and Market Performance: General and O40 - Economic Growth and Aggregate Productivity: General
Creator: Luttmer, Erzo G. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 657 Abstract:
Given a common technology for replicating blueprints, high-quality blueprints will be replicated more quickly than low-quality blueprints. If quality begets quality, and firms are identified with collections of blueprints derived from the same initial blueprint, then, along a balanced growth path, Gibrat’s Law holds for every type of firm. A firm size distribution with the thick right tail observed in the data can then arise only when the number of blueprints in the economy grows over time, or else firms cannot grow at a positive rate on average. But when calibrated to match the observed firm entry rate and the right tail of the size distribution, this model implies that the median age among firms with more than 10,000 employees is about 750 years. The problem is Gibrat’s Law. If the relative quality of a firm’s blueprints depreciates as the firm ages, then the firm’s growth rate slows down over time. By allowing for rapid and noisy initial growth, this version of the model can explain high observed entry rates, a thick-tailed size distribution, and the relatively young age of large U.S. corporations.
Keyword: Gibrat's Law, Firm age and size distribution, and Capital accumulation Subject (JEL): O40 - Economic Growth and Aggregate Productivity: General and L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
Creator: Aiyagari, S. Rao Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 393 Abstract:
This paper demonstrates a connection between failure of Walras’ Law and nonoptimal equilibria in a quite general overlapping generations model. Consider the following implication of Walras’ Law in finite economies. Suppose that all prices are positive and that all agents are on their budget lines. Then, no matter how the set of goods is partitioned, there cannot be an excess supply (in value terms) for some other set in the partition with excess demand (in value terms) for some other set in the partition. We use the Cass (1972), Benveniste (1976, 1986), Balasko and Shell (1980), and Okuno and Zilcha (1980) price characterization of optimality of equilibria in pure exchange overlapping generations models to show the following link between the above implication of Walras’ Law and optimality of a competitive equilibrium. A competitive equilibrium is nonoptimal if and only if the above implication of Walras’ Law fails in its neighborhood.
Creator: Rossi-Hansberg, Esteban and Wright, Mark L. J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 381 Abstract:
Most economic activity occurs in cities. This creates a tension between local increasing returns, implied by the existence of cities, and aggregate constant returns, implied by balanced growth. To address this tension, we develop a general equilibrium theory of economic growth in an urban environment. In our theory, variation in the urban structure through the growth, birth, and death of cities is the margin that eliminates local increasing returns to yield constant returns to scale in the aggregate. We show that, consistent with the data, the theory produces a city size distribution that is well approximated by Zipf’s Law, but that also displays the observed systematic under-representation of both very small and very large cities. Using our model, we show that the dispersion of city sizes is consistent with the dispersion of productivity shocks found in the data.
Keyword: Balanced Growth, Gibrat's Law, Size Distribution of Cities, Economic Growth, Zip's Law, and Scale Effects Subject (JEL): E00 - Macroeconomics and Monetary Economics: General, R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics: General, and O40 - Economic Growth and Aggregate Productivity: General
Creator: Rossi-Hansberg, Esteban and Wright, Mark L. J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 382 Abstract:
Why do growth and net exit rates of establishments decline with size? What determines the size distribution of establishments? This paper presents a theory of establishment dynamics that simultaneously rationalizes the basic facts on economy-wide establishment growth, net exit, and size distributions. The theory emphasizes the accumulation of industry-specific human capital in response to industry-specific productivity shocks. It predicts that establishment growth and net exit rates should decline faster with size and that the establishment size distribution should have thinner tails in sectors that use human capital less intensively or physical capital more intensively. In line with the theory, the data show substantial sectoral heterogeneity in U.S. establishment size dynamics and distributions, which is well explained by variation in physical capital intensity.
Keyword: Establishment Dynamics, Zip's Law, Size Distribution of Establishments, Scale Effects, and Gibrat's Law Subject (JEL): L11 - Production, Pricing, and Market Structure; Size Distribution of Firms, L16 - Industrial Organization and Macroeconomics: Industrial Structure and Structural Change; Industrial Price Indices, and L25 - Firm Performance: Size, Diversification, and Scope
Creator: Fernandez, Raquel, 1959- and Rogerson, Richard Donald Series: Law and economics of federalism Abstract:
This paper examines the effect of different education financing systems on the level and distribution of resources devoted to public education. We focus on California, which in the 1970's was transformed from a system of mixed local and state financing to one of effectively pure state finance and subsequently saw its funding of public education fall between ten and fifteen percent relative to the rest of the US. We show that a simple political economy model of public finance can account for the bulk of this drop. We find that while the distribution of spending became more equal, this was mainly at the cost of a large reduction in spending in the wealthier communities with little increase for the poorer districts. Our model implies that there is no simple trade-off between equity and resources; we show that if California had moved to the opposite extreme and abolished state aid altogether, funding for public education would also have dropped by almost ten percent.
Keyword: Education finance reform, Public finance, California, State government policy, and Human capital Subject (JEL): I22 - Educational Finance; Financial Aid, H42 - Publicly Provided Private Goods, and I28 - Education: Government Policy
Creator: Garrido, Miguel and Schulhofer-Wohl, Sam Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 474 Abstract:
The Cincinnati Post published its last edition on New Year’s Eve 2007, leaving the Cincinnati Enquirer as the only daily newspaper in the market. The next year, fewer candidates ran for municipal office in the Kentucky suburbs most reliant on the Post, incumbents became more likely to win re-election, and voter turnout and campaign spending fell. These changes happened even though the Enquirer at least temporarily increased its coverage of the Post’s former strongholds. Voter turnout remained depressed through 2010, nearly three years after the Post closed, but the other effects diminished with time. We exploit a difference-in-differences strategy and the fact that the Post’s closing date was fixed 30 years in advance to rule out some noncausal explanations for our results. Although our findings are statistically imprecise, they suggest that newspapers—even underdogs such as the Post, which had a circulation of just 27,000 when it closed—can have a substantial and measurable impact on public life.
Keyword: Joint operating agreements, Elections, and Newspapers Subject (JEL): K21 - Antitrust Law, D72 - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior, N82 - Micro-Business History: U.S.; Canada: 1913-, and L82 - Entertainment; Media
Creator: Boot, Arnoud W. A. (Willem Alexander), 1960-, Greenbaum, Stuart I., and Thakor, Anjan V. Series: Economic growth and development Abstract:
The paper proposes a theory of ambiguous financial contracts. Leaving contractual contingencies unspecified may be optimal, even when stipulating them is costless. We show that an ambiguous contract has two advantages. First, it permits the guarantor to sacrifice reputational capital in order to preserve financial capital as well as information reusability in states where such tradeoff is optimal. Second, it fosters the development of reputation. This theory is then used to explain ambiguity in mutual fund contracts, bank loan commitments, bank holding company relationships, the investment banker's "highly confident" letter, non-recourse debt contracts in project financing, and other financial contracts.
Subject (JEL): G20 - Financial Institutions and Services: General and K12 - Contract Law