Virtue of Bad Times and Financial Market Frictions

Schumpeter (1939) proposes that recessions have virtue in promoting growth-enhancing activities. However, this view is often at odds with data, as many innovative activities appear pro-cyclical. We revisit the "virtue of bad times" theoretically and empirically. Our theory suggests that recessions have such virtue only when the cyclicality of innovation's marginal opportunity cost dominates that of its marginal expected return; but binding financial constraints can hinder such virtue, preventing innovation from rising during recessions. Our theory is carried to an industry panel of production and innovation. Our evidence suggests that recessions indeed have potential virtue, but such virtue is hindered by financial-market frictions.Recessions; Growth; Financial-market frictions

The Scarring Effect of Recessions

Recessions often coincide with intensified restructuring. The conventional Schumpeterian view argues that recessions promote allocative efficiency by driving out less productive firms and freeing resources for more productive uses. This paper proposes that the conventional cleansing effect is offset by a scarring effect. Recessions impede the development of potentially superior firms, which might put innovations to better uses, but which are destroyed during their infancy, and never realize their potential. A model of industry dynamics that combines Schumpeterian creative destruction with firm learning is developed to capture both the cleansing and scarring effects. Calibrating the model with data from the U.S. manufacturing sector demonstrates that the scarring effect is likely to dominate the cleansing effect, and accounts for the procyclicality of average labor productivity, a phenomenon at odds with conventional cleansing models.Business cycles; Cleansing effect; Scarring effect; Creative destruction; Learning; Job flows

Plant Life Cycle and Aggregate Employment Dynamics

Past empirical studies have repeatedly found the link between plant life cycle and aggregate employment dynamics: cross-section aggregate employment dynamics differ significantly by plant age. Interestingly, the dynamics of plant-level productivity distribution also display a strong age pattern. This paper develops a model of plant life cycle with demand fluctuations, to capture both of these empirical regularities. We model plants to differ by vintage, and an idiosyncratic component that is not directly observable, but can be learned over time. We show that this model, developed to match the observed dynamics of plant-level productivity distribution, introduces two driving forces for job flows: learning and creative destruction. The resulting job flows can match, both qualitatively and quantitatively, the differences between young and old plants in their job-flow magnitude and cyclical responses observed in the U.S. manufacturing sector.Plant life cycle; Employment dynamics; Heterogeneous employers; Job creation; Job destruction; Productivity dynamics; Demand fluctuations

On the cyclicality of R&D: disaggregated evidence

This paper explores the link between short-run cycles and long-run growth by> examining the cyclical properties of R&D at the disaggregated industry level.> The relationship between R&D and output is estimated using an annual panel of> 20 U.S. manufacturing industries from 1958 to 1998. The results indicate that> R&D is in fact procyclical; but interestingly, estimates using demand-shift> instruments suggest that it responds asymmetrically to demand shocks. We> discuss the possibilities that liquidity constraints and technology> improvement cause the observed procyclicality of R&D.Business cycles ; Research and development

The Scarring Effect of Recessions

This paper explores the role that recessions play in resource allocation. The conventional cleansing view, advanced by Schumpeter in 1934, argues that recessions promote more efficient resource allocation by driving out less productive units and freeing up resources for better uses. However, empirical evidence is at odds with this view: average labor productivity is procyclical, and jobs created during recessions tend to be short-lived. This paper posits an additional "scarring" effect: recessions "scar" the economy by killing off "potentially good firms". By adding learning to a vintage model, I show that as a recession arrives and persists, the reduced profitability limits the scope of learning, makes labor less concentrated on good firms, and thus pulls down average productivity. Calibrating my model using data on job flows from the U.S. manufacturing sector, I find that the scarring effect is likely to dominate the conventional cleansing effect, and can account for the observed pro-cyclical average labor productivityBusiness Cycles, Cleansing Effect, Scarring Effect, Creative Destruction, Learning, Job Flows

Corruption as Collateral

We propose corruption can substitute for conventional collateral in enforcing financial commitments when institutions are poor. A theoretical framework with agency frictions is built, in which corruptive relations with government officials keep firms committed to loan payments. Based on this framework, we hypothesize the anti-corruption investigation destroys the commitment mechanism so that firms default and, most importantly, firms default strategically as long as they can substitute corruption with other collateral. We investigate regional data and firm-level data from China, and find powerful evidence supporting our hypotheses

A Novel Repair Sequence Scheduling Method for Post-Disaster Critical Infrastructure Systems

This paper formulates the repair sequence scheduling problem for damaged component in post-disaster critical infrastructure systems (CISs) under limited repair resources in a general form and proposes a heuristic method to solve the problem. The proposed method are compared with typical existing solution methods in the literature in terms of the optimality gap and computational cost. All these methods are applied into post-earthquake damage scenarios for a real electric power system. Results show that the proposed method has better performance than existing methods and can be applied to the recovery of large-scale CISs with extensive disruptions

Resource Reallocation, Productivity Dynamics, and Business Cycles

This dissertation explores the interactions between resource reallocation, productivity dynamics and business cycles. A theory that combines two driving forces for resource reallocation, learning and creative destruction, is presented to reconcile several empirical findings of gross job flows. The theory suggests a scarring effect, in addition to the conventional Schumpeterian cleansing effect, of recessions on the allocation efficiency of resources. I argue that while recessions kill off some of the least productive businesses, they also impede the development of potentially good businesses -- the ones that might have proven to be efficient in the future are cleared out and lose the opportunity to realize their potential. Calibrations of the model using US manufacturing job flows suggest that the scarring effect is likely to dominate the cleansing effect and account for the observed pro-cyclical average productivity