Endogenous Fluctuations of Investment and Output in a Model of Discrete Capital Adjustments

This paper presents a model of endogenous fluctuations of investment and output at the business cycles frequencies. Aggregate investments fluctuate endogenously due to the strategic complementarity of micro-level lumpy investments. The investment fluctuations are transmitted to the output via variable utilization of capital. Simulations show that there is a range of parameter values under with the model economy exhibits a large magnitude of fluctuations and comovements in investment and output.business cycles, lumpy investment, variable capacity utilization, nonlinear dynamics

Lumpy Investment, Sectoral Propagation, and Business Cycles

This paper proposes a model of endogenous fluctuations in investment. A monopolistic producer has an incentive to invest when the aggregate demand is high. This causes a propagation of investment across sectors. When the investment follows an (S,s) policy, the propagation size can exhibit a significant fluctuation. We characterize the probability distribution of the propagation size, and show that its variance can be large enough to match the observed investment fluctuations. We then implement this mechanism in a dynamic general equilibrium model to explore an investment-driven business cycle. By calibrating the model with the SIC 4-digit level industry data, we numerically show that the model replicates the basic structure of the business cycles(S,s) policy, aggregation, propagation, heavy-tailed distribution

Detecting Endogenous Effects by Aggregate Distributions: A Case of Lumpy Investments

This paper studies the effect of strategic complementarity among firms' lumpy investments on the fluctuations of aggregate investments. We investigate an extensive panel data set on Italian manufacturing firms. We first show that the fluctuations of fraction of firms that experience large investment rates in a region-year follow a double-exponential distribution. We then estimate the degree of the strategic complementarity within a region directly by estimating the firm's decision on lumpy investments. We propose a simple sectoral model which is capable of generating the double-exponential distribution for the aggregate fluctuations that arise from the strategic complementarity among firms' lumpy investments. We argue that the shape and magnitude of the aggregate fluctuations observed in the data are consistent with the degree of strategic complementarity estimated at the micro-level in the same data.Strategic complementarity, endogenous effect, non-Gaussian fluctuations

Time-Varying Employment Risks and Consumption: A Quantitative General Equilibrium Study

This paper quantifies the effect of time-varying employment risks on the fluctuations of aggregate consumption in a dynamic general equilibrium with incomplete markets. A government's redistribution policy through provision of unemployment insurance can cause a positive correlation between aggregate consumption and government's payments due to precautionary savings effects. The underlying mechanism is that a reduction of unemployment risk increases expected lifetime income substantially across a wide range of asset-holding groups when the risk reduction is sufficiently persistent. By contrast, the correlation between consumption and government becomes negative when government intervention hampers supply of goods.Time-varying idiosyncratic risk, employment risk, precautionary savings, regime-switching fiscal policy

An interaction-based foundation of aggregate investment fluctuations

This study demonstrates that the interactions of firm-level indivisible investments give rise to aggregate fluctuations without aggregate exogenous shocks. When investments are indivisible, aggregate capital is determined by the number of firms that invest. I develop a method to derive the closed-form distribution of the number of investing firms when each firm's initial capital level varies stochastically. This method shows that idiosyncratic shocks may lead to non-vanishing aggregate fluctuations when the number of firms tends to infinity. I incorporate this mechanism in a dynamic general equilibrium model with indivisible investment and predetermined goods prices. The model features no aggregate exogenous shocks, and the fluctuation is driven by idiosyncratic productivity shocks. Numerical simulations show that the model generates aggregate fluctuations comparable to the business cycles in magnitude and correlation structure under standard calibration

Quantifying Borrowing Constraints and Precautionary Savings

This paper quantifies the effects of precautionary saVIngs In a dynamic stochastic general equilibrium model. I show that Zeldes\u27s estimate [14] of the excess consumption growth for low asset holders is consistent with an incomplete market model when a borrowing constraint point is set at three months\u27 worth of average wage income. The hypotheses of no-borrowing specification and solvency-constraint specification are rejected by a test distribution derived from the stationary equilibrium distribution. At the estimated borrowing constraint, an increase in endowment shock within the range of empirical findings can cause 1.2% increase in saving rate and 10% increase in capital

Investment Risk, Pareto Distribution, and the Effects of Tax

This paper investigates the effects of taxation on the distributions of income and wealth and on the welfare of heterogeneous households. I first demonstrate that the tails of income and wealth distributions converge to a Pareto distribution in a Bewley model in which households bear idiosyncratic investment shocks. This result extends the previous analysis in Nirei (2009). Thereafter, a non-distortionary tax and flat-rate taxes on capital income and consumption are introduced, and their impacts on aggregate wealth, the inequality index, households' welfare, and transition paths are quantitatively investigated. When the tax rate is set to generate the same GDP-government expenditure ratio, the model with capital tax generates smaller aggregate wealth and a smaller inequality index than the case with consumption tax or non-distortionary tax.

Aggregate Fluctuations of Discrete Investments

This paper demonstrates endogenous fluctuations of aggregate investments when firm-level investments follow an (S,s) policy and exhibit strategic complementarity. We present a method to characterize the aggregate fluctuations that arise from the interaction of the (S,s) policies. A closed-form distribution function of the output growth rate is derived in general environments. We show that the growth rate has a strictly positive variance even when the number of firms tends to infinity if the production exhibits constant returns to scale and the real wage and interest rate are fixed.Lumpy investment, (S,s) economy, strategic complementarity, self-organized criticality, fat-tailed distribution

Zipf's Law, Pareto's Law, and the Evolution of Top Incomes in the U.S.

We construct a tractable neoclassical growth model that generates Pareto's law of income distribution and Zipf's law of the firm size distribution from idiosyncratic, firm-level productivity shocks. Executives and entrepreneurs invest in risk-free assets as well as their own firms' risky stocks, through which their wealth and income depend on firm-level shocks. By using the model, we evaluate how changes in tax rates can account for the evolution of top incomes in the U.S. The model matches the decline in the Pareto exponent of the income distribution and the trend of the top 1% income share in recent decades

Pareto Distributions and the Evolution of Top Incomes in the U.S.

This paper presents a dynamic general equilibrium model with heterogeneous firms and entrepreneur's portfolio choice. We analytically show that this model generates the Pareto distribution of top income earners and Zipf's law of firms at the steady state. The differential equation for the probability density distribution of income is derived and numerically evaluated. In the model, CEOs respond to a tax cut by increasing their share of stocks of their own firms, thereby increasing the diffusion of their wealth. The calibrated model shows that the transition path matches with the decline of the Pareto exponent of the income distribution and the trend of top 1% income share in the U.S. in recent decades. We argue that the low marginal income tax at the top bracket of income could lead to the higher dispersion of income among the top income earners, which results in the higher concentration of income in the top income group