Production complementarities and flexibility in a model of entrepreneurship

The focus of this paper is the flexibility in working hours as a motive for entrepreneurship. The model exhibits inflexibilities for workers and entrepreneurs, which arise due to complementarities in production. In addition, it allows for volatile value of leisure to make flexibility in hours desirable. Differences in occupation-specific flexibility, disciplined with the observed patterns in hours (level, persistence, dispersion) and income (persistence, dispersion), can explain relatively low income levels of entrepreneurs in the US and the occupation-specific distributions of working hours and income. Policy relevance of the model features is discussed using experiments of workweek restrictions and income taxation. (C) 2017 Elsevier B.V. All rights reserved.I gratefully acknowledge the support from the Ministerio Economia y Competitividad (Spain), Maria de Maeztu grant (MDM 2014-0431), and from Comunidad de Madrid, MadEco-CM (S2015/HUM-3444)

Who quits next? Firm growth in growing economies

We document novel facts about the relationship between aggregate growth and firm dynamics using a large set of countries. We argue that firm employment patterns are not necessarily informative about cross-country differences in aggregate growth because they are induced by changes in the productivity of a firm relative to others. In contrast, aggregate growth is linked to average firm-level productivity growth and firm age. We formalize this intuition through a tractable model of endogenous aggregate growth and firm dynamics where firms realize positive returns to investment with some probability. We find that cross-country disparities in this probability can account for two-thirds of the variation in aggregate growth.Yurdagul gratefully acknowledges the support from the Ministerio de Economía y Competitividad (Spain) (ECO2015-68615-P), María de Maeztu grant (MDM 2014-0431), and from Comunidad de Madrid, MadEco-CM (S2015/HUM-3444)

Trend shocks and sudden stops

Sudden Stops are characterized by large output drops, current account reversals and real exchange rate depreci-ation followed by a slow recovery, a pattern that has proven to be hard to capture with standard open economymodels. This paper extends the standard models with endogenous collateral constraints to include permanentincome (trend) shocks and studies the optimal policy design in this setting. Wefind that shocks to the trendplay an important role in generating a Sudden Stop followed by a slow recovery, a result that is also supportedby the data. With trend and transitory shocks, optimal capital control policy is procyclical, although less sothan under transitory shocks only.We gratefully acknowledge financial support from MDM 2014-0431, and Comunidad de Madrid, MadEco-CM (S2015/HUM-3444). Seoane gratefully acknowledges financial support from, Ministerio de Ciencia, Innovacion y Universidades (Spain) grant IJCI-2015-24465, "Programa propio de investigación" (PPI-2016-A-54) from Universidad Carlos III de Madrid, and the Ministerio Economía y Competitividad (Spain), grant ECO2016-76818-C3-1-P and ECO2014-56676-C2-1-P. Yurdagul gratefully acknowledges financial support from Ministerio Economía y Competitividad (Spain), grant ECO2015-68615-P., and from the Ministerio de Ciencia, Innovacion y Universidades (FJCI-2016-28864)

Endogenous hours and the wealth of entrepreneurs

US entrepreneurs typically work long hours in their firms and these hours form a large part of the firms' labor input. This paper studies the role of endogenous owner hours in shaping the wealth distribution among entrepreneurs. We introduce owners' endogenous labor supply into a model of entrepreneurial choice and financial frictions. The model fits well the levels and the dispersion of wealth among entrepreneurs. Long owner hours incentivize poor, highly productive individuals to be owners and help the most productive owners to accumulate large quantities of wealth. On net, owners working long hours decreases the median owner wealth and increase wealth dispersion among owners. Differently, the ability to work sufficiently short hours incentivizes owners to run low productivity firms with high wealth to income ratios. Finally, alternative calibrations ignoring the endogenous labor supply of owners lead to owners that are much richer than in the data and overstate the effect of financial frictions in the economy.We thank the Kauffman Foundation and the NORC Data Enclave for providing research support and access to the data used in this research. We also gratefully acknowledge the support from the Ministerio de Econom`ıa y Competitividad (Spain) (grant numbers ECO2014-56384-P and ECO2015-68615-P), Mar`ıa de Maeztu grant (MDM 2014-0431), and from Comunidad de Madrid, MadEco-CM (S2015/HUM-3444)

News, sovereign debt maturity, and default risk

Leading into a debt crisis, interest rate spreads on sovereign debt rise before the economy experiences a decline in productivity, suggesting that news about future economic developments may play an important role in these episodes. An empirical VAR estimation shows that a news shock has a larger contemporaneous impact on sovereign credit spreads than a comparable shock to labor productivity. A quantitative model of news and sovereign debt default with endogenous maturity choice generates impulse responses and a variance decomposition similar to the empirical VAR estimates. The dynamics of the economy after a bad news shock share some features of a productivity shock and some features of sudden stop events. However, unlike during sudden stop episodes, long-term debt does not shield the country from bad news shocks, and it may even exacerbate default risk. Finally, an increase in the precision of news allows the government to improve its debt maturity management, especially during periods of high stress in credit markets, and thus face lower yield spreads while increasing the amount of debt.Yurdagul gratefully acknowledges the support from the Ministerio de Economía y Competitividad (Spain) (ECO2015-68615-P), María de Maeztu grant (MDM 2014-0431), and from Comunidad de Madrid, MadEco-CM (S2015/HUM-3444)

Sovereign Debt Restructurings

Sovereign debt crises involve debt restructurings characterized by a mix of face value haircuts and maturity extensions. The prevalence of maturity extensions has been hard to reconcile with economic theory. We develop a model of endogenous debt restructuring that captures key facts of sovereign debt and restructuring episodes. While debt dilution pushes for negative maturity extensions, three factors are important in overcoming the effects of dilution and generating maturity extensions upon restructurings: income recovery after default, credit exclusion after restructuring, and regulatory costs of book value haircuts. We employ dynamic discrete choice methods that allow for smoother decision rules, rendering the problem tractable.Yurdagul gratefully acknowledges the support from the Ministerio de Economía y Competitividad (Spain) (ECO2015-68615-P), María de Maeztu grant (MDM 2014-0431), and from Comunidad de Madrid, MadEco-CM(S2015/HUM-3444)

Essays on Macroeconomics

Chapter 1: Production Complementarities and Flexibility in a Model of Entrepreneurship The choice between salaried work and entrepreneurship has often been studied through the lenses of ability and wealth-related explanations. Nevertheless, recent literature documents that entrepreneurs earn less income than comparable workers, and points to non-pecuniary motives\u27 role in entrepreneurial decisions. In this paper, I focus on the flexibility of hours as a motive for engaging in entrepreneurial activity. Defining flexibility as the ability to modify hours of work without sacrificing hourly income, I develop a model that gives inflexibility for salaried workers. Importantly, this arises as a general equilibrium effect due to complementarities between workers\u27 hours. In a setting featuring volatile value of leisure, such inflexibility can be crucial to individuals\u27 self-selection into entrepreneurship. I show that the flexible hours motive, disciplined with the observed occupation-specific patterns in hours (level, persistence, dispersion) and income (persistence, dispersion), can account for the observed differentials in income levels. Together with this contribution, the proposed setting provides a rich environment to evaluate public policies involving restrictions on working hours. I show that imposing maximum hours in the US can make the salaried work a better option for those who otherwise find it hard to keep up with the working hours in the economy. In particular, individuals that are entrepreneurs before the reform only to avoid undesirable hours can find it optimal to become workers. In turn, such a policy can increase the number of workers and their total hours, as well as the average productivity of entrepreneurs. Chapter 2: Who Quits Next? Firm Growth in Growing Economies (with Julieta Caunedo) This paper provides a theory linking characteristics of the industry dynamics to aggregate growth. We analyze firms\u27 life cycle productivity, employment-age profiles, and firm selection across countries. Using a large cross-country dataset we document (i) more frequent labor productivity growth for firms operating in fast growing economies, (ii) lack of systematic relationship between the tail of the employment size distribution and growth and (iii) steeper employment-age profiles in slow growing economies. Our working thesis is that firms\u27 likelihood of turning their investments into actual productivity growth, and uncertainty on their returns if successful, impacts firms investment in productivity, selection and aggregate growth. We think of firm uncertainty broadly, to include for example political instability, changes in tax regimes, lack of social capital or firm demand fluctuations. We argue that in slow growing rich productive economies, steep-employment age profiles are related to high return uncertainty and strong firm selection. We are able to accommodate poor and rich slow growing economies by decoupling firm\u27s probability of success from return uncertainty. We build a tractable general equilibrium model that displays endogenous long run growth compatible with a stationary size distribution and the documented empirical facts. We contribute to the literature by analyzing how variations in the probability of firm success and return uncertainty account for differences in observed industry structure and its relationship with aggregate growth. Chapter 3: Sovereign Default and the Choice of Maturity (with Juan M. Sanchez and Horacio Sapriza) This paper presents a new quantitative model of endogenous sovereign default, maturity choice and the term structure of bond yield spreads. Sovereigns usually borrow from international markets at positive term spreads and a duration that exceeds one year. Debt duration and term spreads vary with the business cycle, decreasing during periods of higher credit market stress. However, in models of long term sovereign debt and default along the lines of Chatterjee and Eyigungor (2012) and Hatchondo and Martinez (2009), countries would prefer one period bonds if given the choice, largely due to debt dilution. We develop a model with debt dilution that can capture the debt maturity and the term structure of yield spreads found in the data. We identify the financial market features that help explain the observed maturity choice and the associated non-linear pricing of the term structure of bond yield spreads, and we provide a quantitative analysis of the effect of each feature. We find that sudden stop episodes and sovereign debt crisis resolution policies, which generally involve debt reschedulings where the maturity of old instruments is extended,largely account for the sovereigns\u27 maturity choice and the term structure of sovereign bond yields, including the non-monotonic yield curve observed during some debt restructurings, such as the Greek hump-shaped curve in 2011

AIDS, human capital and development

We develop a general equilibrium model to study the impact of HIV/AIDS on human capital accumulation decisions and on aggregate output. We calibrate the model targeting a sample of Sub-Saharan African countries, separately for 1995-2004 and 2010-2017. Our results show that the scale-up of ART treatments since mid-2000s, and the additional reductions in the transmission rate have had a significant impact on output. Counterfactual exercises suggest significant output gains from further increasing ART treatment and decreasing infectiousness. The output gains are substantially larger than the costs. We find that treatment and policies that reduce infection (e.g. condom use) are substitutes.The author gratefully acknowledges the support from the Ministerio de Economìa y Competitividad (Spain) (ECO2015-68615-P), Marìa de Maeztu grant (MDM 2014-0431), from Comunidad de Madrid, MadEco-CM (S2015/HUM-3444), and from the Ministerio de Ciencia, Innovación y Universidades (FJCI-2016-28864 and IJC2018-038229-I

Sovereign default and the choice of maturity

This study develops a novel model of endogenous sovereign debt maturity that rationalizes various stylized facts about debt maturity and the yield spread curve: first, sovereign debt duration and maturity generally exceed one year, and co-move positively with the business cycle. Second, sovereign yield spread curves are usually non-linear and upward-sloped, and may become non-monotonic and inverted during a period of high credit market stress, such as a default episode. Finally, output volatility, impatience, risk aversion, and especially sudden stops, are key determinants of maturity, both in our model and in the data.Yurdagul gratefully acknowledges the support from the Ministerio Economía y Competitividad (Spain), María de Maeztu grant (MDM 2014-0431), and from Comunidad de Madrid, MadEco-CM (S2015/HUM-3444)