The Investment Channel of Monetary Policy : Evidence from Norway

We investigate the transmission of monetary policy to investment using Norwegian administrative data. We have two main findings. First, financially constrained firms are more responsive to monetary policy, but the effect is modest; suggesting that firm heterogeneity plays a minor role in monetary transmission. Second, we disentangle the investment channel of monetary policy into direct effects from interest rate changes and indirect general equilibrium effects. We find that the investment channel of monetary policy is due almost exclusively to direct effects. The two results imply that a representative firm framework with investment adjustment frictions in most cases provides a sufficiently detailed description of the investment channel of monetary policy.publishedVersio

The Firms They Are A-Changin’ - Essays on Productivity and Investments in the 21st Century

The times are changing, and so are firms. During the last few decades, we have observed several major macroeconomic changes, including large waves of migration, the rise of the intangible economy, and economic crises, such as the financial crisis and the recent Covid crisis. The essays in this dissertation study how these major changes affect firms' investments and productivity. In the first chapter, I show that unexpected cash flows to firms following monetary policy shocks do not affect firms’ investments. In the second chapter, we find that the immigration-induced labor supply shock to Norway following the 2004 EU enlargement led firms to reduce their R&D investments. In the final chapter, I show that the resource misallocation in Norwegian manufacturing have increased during the last 20 years, and I study how this relates to the rise of intangibles and the productivity slowdown

The Role of Private Finance in Public-Private Partnerships

It seems to be a never-ending debate on whether the public or the private sector should deliver services to the public. Although the political divide seems to be ideologically motivated, the arguments made are often one of efficiency and optimal outcomes. The field of economics plays an important role in separating the facts from the values in this debate, highlighting the advantages and disadvantages of both public and private ownership in various sectors and organizational forms. Public-Private Partnerships (PPPs) are no exception to this. PPPs have been heavily debated since its increasing popularity in the 1980s and 1990s. Its organizational features of providing incentives compatible with socially efficient outcomes are theoretically attractive. In practice, however, there are still much uncertainty as to whether these benefits actually materializes and whether they outweigh the potential costs of such arrangements. While much work has been done on the efficiency gains of PPP arrangements, surprisingly little has been done on the private finance aspect of PPP (Dewatripont and Legros, 2005). It is of course very likely that more research on this aspect of PPPs has been done since 2005. However, to my knowledge there is still quite limited literature on the effect from private finance on the PPP arrangement. In this thesis I investigate the potential benefits of private finance. Assuming private finance is not necessary for realizing the benefits if PPP, does it still have a valuable contribution and if so, how much private finance is necessary to reap the benefits of private finance? Furthermore, does this private finance have any distorting effect on the efficiency gains from PPP? In a influential paper on PPP, Iossa and Martimort (2012) uses an incomplete contract approach to show the costs and benefits of bundling the building and operation of infrastructure projects. Towards the end of the paper, the authors presents a scenario in which there exists a Private Financier with expertise in evaluating project risk. Together with the assumption of private finance being more costly than public finance, this sets the stage for a discussion on the costs and benefits of private finance. This thesis picks up on this discussion and explores when private finance is socially preferable. I investigate this in a setting with a simplified PPP structure but with a more complex private finance arrangement. In this paper I first present a simple PPP model with and without a third party Private Financier, building on the incomplete contract approach by Iossa and Martimort (2012). Then I present the main model including a Private Financier with several changes to the assumption made by Iossa and Martimort (2012). I assume that the Private Financier contributes with some level of private finance to the infrastructure investment and is compensated by receiving a share of the variable income to the consortium of builder and operator in the PPP (from now on referred to as "PPP Consortium"). This Private Financier has the option to exert a level of effort to observe an exogenous shock, to which it can insure the PPP Consortium should the shock be observed. Both the PPP Consortium and the Private Financier are assumed to be risk averse. The Private Financier receives the same share of the risk as the share of revenue it can claim. Thus, the share of risk and revenue needed to provide incentives for Private Financier to exert effort must be large enough such that the cost of exerting effort is lower than the disutility the Private Financier gets from the exogenous risk. I show that under certain conditions, it is socially optimal to have partly private financing and partly public financing. When the infrastructure is only partly financed by a Private Financier, it entails that the Government has been able to extract all the surplus from these contracts. If the Private Finance investment are no more costly than public financing investments, then this solution must also involves no distortions of the PPP Consortium's effort in creating infrastructure quality. However, if we assume that there is a higher financing cost from private finance, like Iossa and Martimort (2012) suggests, then even though the Government extracts all the surplus there is a distortion of reduced PPP Consortium infrastructure quality effort. Thus, whether the Private Finance is socially optimal depends on whether the cost of this distortion is lower than the lump-sum benefit of insuring the PPP Consortium. If the Private Financier's cost of making an effort in observing the shock is high enough relative to the share of risk and revenue it needs to exert this effort, then this model shows that the benefits of having private finance is outweighed by the costs. The reduced infrastructure quality effort made by the PPP Consortium costs more from the Governments point of view than the benefits it gets from insuring the PPP Consortium. Although this implies no private finance, in this model we might still consider including the Private Financier as a form of insurance company. If the total cost of Private Financier effort and investment cost is low enough, then the optimal level of Private Finance is full Private Finance. This scenario might actually involve the Private Financier extracting some of the surplus from the arrangement, assuming that the share of the risk and revenue it needs to exert the effort is high enough relative to total effort and investment costs. This means that even though the Private Financier is able to make a positive profit from the PPP arrangement, it might still be the socially optimal case. This has some interesting real world consequences. It suggests that even though one observes the private financier profiting from PPPs above the competitive level, it might still be the socially optimal solution. This is, of course, not necessarily true in reality but the model does suggests that under certain restricting conditions it might be. Furthermore, this scenario would imply that a higher financing premium is a cost born by the Private Financier and thus the socially optimal case is not affected by changes in the private financing premium. The model I propose in this thesis relies on several simplifying assumptions. I have assumed a separable disutility function for the exogenous risk. This allows for the simple approach of treating the exogenous risk as a separable cost, which is a function of the risk. However, this does run the risk of oversimplifying the problem. Furthermore, the quite restricted financial contractual form I propose must be seen as one of many potential forms that could represent the real world. Therefore, the results and conclusions in this thesis should not be viewed in isolation but seen as a contribution that might provide some additional insights to the role of private finance in Public-Private Partnerships