Abstract: Observed international investment positions and cross-country heterogeneity in rates of return to capital are hard to reconcile with frictionless capital markets. In this paper, we develop a theory of international capital allocation: a multi-country dynamic spatial general equilibrium model in which the entire network of cross-border investment is endogenously determined. Our model features cross-country heterogeneity in fundamental risk, a demand system for international assets, and frictions that cause segmentation in international capital markets. We measure frictions affecting international investment and apply our model to data from nearly 100 countries, using a new dataset of international capital taxes and cultural, geographic and linguistic distances between countries (www.geopoliticaldistance.org). Our model performs well in reproducing the composition of international portfolios, the cross-section of home bias and rates of return to capital, and other key features of international capital markets. Finally, we carry out counterfactual exercises: we show that barriers to international investment reduce world output by almost 7% and account for nearly half of the observed cross-country differences in capital stock per employee.

Presentations: Utah Winter Finance Conference [video], NBER International Finance & Macroeconomics, Princeton University, UC Berkeley Economics, London Business School, USC Marshall, OSU Fisher, UT Austin McCombs, U.Washington Foster, BI Norwegian Business School, UChicago International Macro-Finance Conference, Online International Finance & Macro Seminar (OIFM), BSE Summer Forun, CESifo Macro Money and Finance, American Finance Association, Society for Economic Dynamics, Colorado Winter Finance Summit, European Finance Association, HEC-CEPR Macro-Finance Conference, Yale Junior Finance Conference, D.C. Junior Finance Conference, WEFIDEV, CSEF-DISES U. of Naples Federico II, US International Trade Commission, Econometric Society (ASSA), European Economic Association, Money Macro and Finance Society, FIW Conference, IBEFA Young Economist Seminar Series, RCEA Money Macro & Finance, T3M.

Non-Technical Summary: [Pro-Market @ Chicago Booth]

Presentations: NBER Economic Fluctuations and Growth, NBER Industrial Organization, NBER Mega-Firms Conference, NBER Summer Institute (Income Distribution and Macro), Columbia Macroeconomics, Columbia Finance, UPenn Wharton, Northwestern Kellogg (Finance), Northwestern Kellogg (MEDS), Johns Hopkins Carey, University of Wisconsin Madison, UMaryland (Economics Dept.),  University of Maryland Smith, University of Cambridge, University of Southern California (Economics Dept.), UMinnesota Carlson, Texas A&M Mays, Bank of Italy, Stockholm IIES, Einaudi Institute for Economics and Finance (EIEF), Swiss Finance Institute/EPFL, Bocconi University, American Finance Association, Western Finance Association, Society for Economic Dynamics, SFS Cavalcade North America, Texas Finance Festival, BSE Summer Forum, UK Competition & Markets Authority, Hellenic Competition Commission, UChicago Networks Conference, Oxford Firm Heterogeneity & the Macroeconomy, Finance Organizations and Markets (FOM), EARIE, Econometric Society European Meeting, IIOC,  American Economic Association, Royal Economic Society, Econometric Society World Congress, European Economic Association, Oligo Workshop.

Abstract:  We study the welfare implications of the rise of common ownership in the United States from 1995 to 2021. We build a general equilibrium model with a hedonic demand system in which firms compete in a network game of oligopoly. Firms are connected through two large networks: the first reflects ownership overlap, the second product market rivalry. In our model, common ownership of competing firms induces unilateral incentives to soften competition and the magnitude of the common ownership effect depends on how much the two networks overlap. We estimate our model for the universe of U.S. public corporations using a combination of firm financials, investor holdings, and text-based product similarity data. We perform counterfactual calculations to evaluate how the efficiency and the distributional impact of common ownership have evolved over time. Under the assumption that firms maximize a share-weighted average of their shareholder’s income, we find that the welfare cost of common ownership, measured as the ratio of deadweight loss to total surplus, has increased about ninefold between 1995 and 2021. Under various definitions of shareholder income, the deadweight loss of common owner- ship ranges between 3.5% and 13.2% of total surplus in 2021. The rise of common ownership also produces a significant reallocation of surplus from consumers to producers.

Non-Technical Summary: [Pro-Market @Chicago Booth] [Harvard Law School Corporate Governance Forum] 

Policy Influence: [Joint FTC-DOJ Antitrust comment to FERC]

Presentations: NBER Mega-Firms Conference, NBER Organizational Economics, NYU Stern, USC Marshall, Duke Fuqua, Federal Trade Commission, Berkeley/Columbia/Duke/MIT/Nortwhestern IO Theory Conference, Red Rock Finance Conference, SFS Cavalcade, Virtual Corporate Finance Seminar, LSE Networks Conference, UTDT Annual Conference, Finance, Organizations & Markets, American Economic Association, American Finance Association, Equitable Growth Conference, Swiss Finance Institute/USI, Copenhagen Business School, Cambridge Judge, Tillburg U., Maastricht U., Econometric Society European Meeting, BSE Summer Forum, Society for Economic Dynamics, GMU Center for Micro-Economic Policy, European Finance Association, North American Econometric Society Summer Meeting, Midwest Finance Association, CEPR FirmOrgDyn, Cambridge Network Economics Conference, ALEA, SAET.

Abstract: An important strand of research in macro-finance investigates which factors impede enterprise investment, and what is their aggregate economic cost. In this paper, we make two contributions to this literature. The first contribution is methodological: we introduce a novel framework to calibrate macroeconomic models with firm-level distortions using enterprise survey micro-data. The core of our innovation is to explicitly model the firms’ decisions to report in the survey the distortions they face. Our second contribution is to apply our method across seven countries to characterize the distribution of these distortions and estimate the gross domestic product (GDP) loss induced by distortionary red tape. Our estimates are based on a dynamic general equilibrium model with heterogeneous firms whose capital investment decisions are distorted by red tape. We find that the aggregate cost of red tape varies widely across the countries in our dataset, with an average cost of 0.8% of annual GDP. Our framework opens up a new range of applications for enterprise surveys in macro-financial modeling and policy analysis.

Non-Technical Summary: [Pro-Market @ Chicago Booth]

Presentations: Rice U. Conference on Firms Productivity and Growth, UChicago Booth, BSE Summer Forum, CEBRA, Econometric Society Asia Meeting, American Economic Association, Econometric Society European Meeting, ESCOE, UCLA-UCBerkeley Political Economy Workshop, DC Junior Finance Conference, London Business School (TADC).

Abstract: We provide new facts about the cross-section and evolution of mergers and acquisitions for US public firms. Using a general equilibrium model with a hedonic demand system and data on institutional ownership, we document that mergers are increasingly concentrated among firm pairs with a high degree of product market interaction and a moderate-to-high degree of common ownership. We estimate how much mergers have raised aggregate corporate profits and reduced consumer surplus and quantify how the anti-competitive effects of mergers are affected by common ownership and shareholder value maximization motives.

Abstract: In the seminal rational inattention model of Matêjka and McKay (2015), logit demand arises from the discrete choice of agents who are uncertain about choice payoffs and have access to a flexible, costly information acquisition technology (RI-logit). A notable limitation of this powerful framework is the lack of known general closed-form solutions that allow the decision maker's prior information to be asymmetric across choices. In this paper, I solve the RI-logit model analytically for a large family of priors known as multivariate Tempered Stable (TS) distributions. In my analytical formulation, decision makers can be biased, display aversion to prior uncertainty, and thus tend to select choices that are familiar (i.e. for which they hold a less disperse prior). My result extends the applicability of the RI-logit model to a new range of settings where prior information matters. I provide one such application, by showing how it can be used to model the behavior of risk-averse investors who select risky projects in an environment characterized by epistemic uncertainty (risk-adjusted expected returns are unknown, but can be learnt at a cost).

Presentations: Econometric Society/ASSA.

Abstract: We study the impact of the last five decades of financial globalization on world GDP and income distribution, employing a novel multi-country dynamic general equilibrium model that embeds a demand system for international assets. We introduce, estimate and validate new country-level measures of inward and outward Revealed Capital Account Openness (RKO), which are derived from wedge accounting. The implementation of our framework requires only minimal data, which is available as early as 1970 (national income accounts, external assets and liabilities positions). Our RKO wedges reveal enormous heterogeneity in the pace of capital account liberalization, with richer countries liberalizing much faster than poorer ones. We call this pattern Unbalanced Financial Globalization. We then utilize our model to simulate a counterfactual trajectory of the global economy, where the RKO wedges are fixed at their pre-globalization levels. We find that unbalanced financial globalization led to a worsening of capital allocation (lowering world GDP by 1.4%), a 10% rise in the cross-country dispersion of GDP per capita, lower wages in poorer countries and lower cost of capital in high-income countries. These findings stand in sharp contrast to the predictions of standard models of financial markets integration, where capital account barriers decline symmetrically across countries. We also study counterfactual globalization patterns where countries open their capital account in a symmetric or convergent fashion, and find that these scenarios produce diametrically opposite effects (significant improvements in capital allocation efficiency and lower cross-country inequality, higher wages in poor countries, etc..). These findings underscore the pivotal role played by country heterogeneity in shaping the real effects of capital markets integration.

Presentations: SFS Cavalcade 2025 (scheduled), UChicago International Macro-Finance Conference, Fed St.Louis/Wasth U. Conference on Macroeconomics & Inequality, GWU International Macro Seminar, CEPR Salento Macro Meetings, CESifo Macro Money and International Finance; DC Junior Finance Conference, Washington Area International Finance Symposium, American Economic Association, European Economic Association, IMF Annual Macro-Finance Conference, CKGSB.

Abstract: Measuring the welfare impact of new product introductions is a major, long-standing problem in economics. In this study, we make progress on this challenge by leveraging the informational efficiency of equity markets and a scalable model of consumer demand. We use stock market reactions to new product announcements over a twenty-year period (2002-2021) to estimate the future profits they generate for their inventor firms. We then use a GHL oligopoly model to measure the change in competitors' profits as well as consumer welfare induced by these new products, ultimately obtaining their aggregate welfare contribution in dollars. Our analysis reveals that new products introduced annually by US publicly-traded corporations alone produce substantial welfare gains, averaging 0.15-0.20% of US yearly GDP. Producer surplus accounts for roughly 60% of these gains. This estimate is significantly larger than the corresponding figure for existing products. We show that this is due to the fact that new product creation is highly concentrated among firms that have a high degree of market power.

Presentations: NBER Innovation Information Initiative, UChicago Stigler Center Affiliate Conference.

Abstract: A few thousand firms account for a disproportionate share of cross-border trade and capital flows. How does local product market competition among these firms affect international trade and investment? Conversely, how do frictions in international asset and goods trade affect these firms' market power? To answer these questions, we present a novel quantitative spatial model of international oligopoly with GHL demand and endogenous capital supply. In our model firms endogenously export their output subject to trade frictions and source capital internationally from risk-averse investors subject to investment frictions. We take our model to the data using firm-level balance sheets, the geographic distribution of sales of international publicly-traded firms, and a novel database of text-based product similarity measures, in the style of Hoberg and Phillips (2016) – which we make publicly available. We estimate GHL demand for the universe of global publicly-traded firms across 16 countries (9.2 billion elasticities). We then use our model to quantify the role of international oligopolists on capital flows and goods trade, with an emphasis to their product market conduct. We also study how financial and goods market frictions affects product market rivalry among multinational firms.

Abstract: Relative Performance Evaluation (RPE) is a common feature of executive compensation contracts that is used to incentivize managerial effort. A side effect of RPE that is lesser-known (yet trivial to prove theoretically) is to alter product market conduct, as it provides a motive for managers to hurt competitors' profits rather than pursue the maximization of their own firm's profits. To quantify these effects, we build a general equilibrium model of oligopoly with GHL demand and ultra-realistic managerial incentives. In our model, the pro-competitive effects of RPE increase with the assortativity between the network of product rivalries and the network of RPE benchmarking relationships. To construct the latter, we undertake a massive data analysis effort to process highly-unstructured data from over 15,000 executive compensation contracts. We then use our model to quantify, firm-by-firm, the effect of RPE on the firm's supply decisions, allocative efficiency and consumer welfare..

Presentations: UChicago Stigler Center Affiliate Conference, SIOE.

Abstract:  Italy’s aggregate productivity abruptly stopped growing in the mid-1990s. This stop represents a puzzle, as it occurred at a time of stable macroeconomic conditions. In this paper, we investigate the possible causes of this “disease” by using sector and firm-level data. We find that Italy’s productivity disease was most likely caused by the inability of Italian firms to take full advantage of the ICT revolution. While many institutional features can account for this failure, a prominent one is the lack of meritocracy in the selection and rewarding of managers. Unfortunately, we also find that the prevalence of loyalty-based management in Italy is not simply the result of a failure to adjust, but an optimal response to the Italian institutional environment. Italy’s case suggests that familism and cronyism can be serious impediments to economic development even for a highly industrialized nation.

Presentations: Cornell U. "100 years of Development", American Economic Association, European Economic Association, UCLA Anderson-UCBerkeley Haas Political Economy Workshop.