The Micro and Macro of Managerial Beliefs

2020 ◽  
Author(s):  
Jose Maria Barrero
Keyword(s):  
Rational Expectations ◽  
Asset Price ◽  
Heterogeneous Firms ◽  
Adjustment Costs ◽  
Consumer Welfare ◽  
Sales Growth ◽  
Firm Level ◽  
Managerial Decisions ◽  
Managerial Beliefs ◽  
Growth Volatility

This paper studies how biases in managerial beliefs affect managerial decisions, firm performance, and the macroeconomy. Using a new survey of US managers I establish three facts. (1) Managers are not over-optimistic: sales growth forecasts on average do not exceed realizations. (2) Managers are overprecise (overconfident): they underestimate future sales growth volatility. (3) Managers overextrapolate: their forecasts are too optimistic after positive shocks and too pessimistic after negative shocks. To quantify the implications of these facts, I estimate a dynamic general equilibrium model in which managers of heterogeneous firms use a subjective beliefs process to make forward-looking hiring decisions. Overprecision and overextrapolation lead managers to overreact to firm-level shocks and overspend on adjustment costs, destroying 2.1 percent of the typical firm’s value. Pervasive overreaction leads to excess volatility and reallocation, lowering consumer welfare by 0.5 to 2.3 percent relative to the rational expectations equilibrium. These findings suggest overreaction may amplify asset-price and business cycle fluctuations.

Studying the Incubation of a New Product Market Through Realized and Alternative Histories

2020 ◽  
Vol 5 (3) ◽  
pp. 160-192 ◽  
Author(s):  
Daniel Engler ◽  
Gino Cattani ◽  
Joe Porac
Keyword(s):  
New Product ◽  
General Motors ◽  
Middle Ground ◽  
Firm Level ◽  
Managerial Decisions ◽  
Managerial Beliefs ◽  
Alternative Methodology ◽  
Environmental Shocks ◽  
Product Cannibalization ◽  
Respective Product

In this paper, we contribute to the literature on new market emergence by implementing a “history-friendly” simulation of the incubation period encompassing the decision processes that took place within General Motors (GM), Chrysler, and Ford during the design and development of the first U.S. minivan. Our work offers a “middle ground” alternative methodology for unpacking the “black box” of market incubation processes. Our middle ground approach is useful for exploring the complex interdependencies among four general mechanisms that shape market incubation: environmental shocks that open up new technological possibilities, firm-level capabilities that allow firms to differentially take advantage of these possibilities, various incentives (e.g., product cannibalization, rivalry) that influence a firm’s willingness to exploit new possibilities, and managerial beliefs about the viability of these possibilities. Complex nonlinear interdependencies exist among these mechanisms, and historical contingencies affect the way in which they interact. We identify important historical contingencies within and across GM, Ford, and Chrysler in their precommercialization managerial decisions prior to Chrysler’s introduction of the Voyager and Caravan in 1983. We use the historical details of actual market incubation to calibrate the simulation and develop plausible alternative (both near and hypothetical) histories of that incubation. Understanding why Chrysler, Ford, and General Motors made their respective product commercialization choices not only pertains to automotive history, but can also illuminate the complexities inherent in market incubation processes.

scholarly journals Adjustment costs and factor demand: New evidence from firms’ real estate*

2020 ◽  
Author(s):  
Antonin Bergeaud ◽  
Simon Ray
Keyword(s):  
Real Estate ◽  
Causal Effect ◽  
Heterogeneous Firms ◽  
Adjustment Costs ◽  
Firm Dynamics ◽  
Labour Demand ◽  
Firm Level ◽  
Factor Demand ◽  
Corporate Real Estate ◽  
Real Estate Prices

Abstract We study corporate real estate frictions and its effect on firm dynamics and labour demand. We build and simulate a general equilibrium model with heterogeneous firms that predicts the response of firms to a productivity shock in the presence of fixed adjustment costs on real-estate. Using a large firm-level database merged with local real estate prices, we then exploit variations in the tax on capital gain to document a causal effect of adjustment costs on firms’ labour demand and derive new results on the causes and implications of firms’ local relocation.

scholarly journals Trade credit, trade income elasticity and the international transmission of shocks

2021 ◽  
Author(s):  
Anna Watson
Keyword(s):  
International Trade ◽  
Open Economy ◽  
Trade Credit ◽  
Income Elasticity ◽  
Heterogeneous Firms ◽  
Firm Level ◽  
Macroeconomic Shocks ◽  
Cyclical Fluctuations ◽  
Irish Data ◽  
The Impact

AbstractThe paper examines the impact of trade credit on cyclical fluctuations in international trade. It provides new empirical evidence based on firm-level UK and Irish data showing that exporters use trade credit more actively and intensively than non-exporters. The study introduces inter-firm lending into an open economy general equilibrium model with heterogeneous firms and endogenous entry into the exports market. It demonstrates that trade credit amplifies the impact of macroeconomic shocks on international trade both along the intensive and extensive margins and that it significantly contributes to the high trade income elasticity observed in the data.

scholarly journals The Financing of Ideas and the Great Deviation

2017 ◽  
Vol 17 (176) ◽  
Author(s):  
Daniel Garcia-Macia
Keyword(s):  
Great Recession ◽  
Heterogeneous Firms ◽  
Intangible Capital ◽  
Model Matching ◽  
Slow Recovery ◽  
Firm Level ◽  
The Great Recession ◽  
Financing Costs ◽  
Speed Up ◽  
Intangible Investment

Why did the Great Recession lead to such a slow recovery? I build a model where heterogeneous firms invest in physical and intangible capital, and can default on their debt. In case of default, intangible assets are harder to seize by creditors. Hence, intangible capital faces higher financing costs. This differential is exacerbated in a financial crisis, when default is more likely and aggregate risk bears a higher premium. The resulting fall in intangible investment amplifies the crisis, and gradual intangible spillovers to other firms contribute to its persistence. Using panel data on Spanish manufacturing firms, I estimate the model matching firm-level moments regarding intangibles and financing. The model captures the extent and components of the Great Recession in Spanish manufacturing, whereas a standard model without endogenous intangible investment would miss more than half of the GDP fall. A policy of transfers conditional on firm age could speed up the recovery, as young firms tend to be more financially constrained, particularly regarding intangible investment. Conditioning transfers on firm size or subsidizing credit (as in current E.U. policy) appears to be less effective.

Capital Allocation in Developing Countries

2020 ◽  
Author(s):  
Joel M David ◽  
Venky Venkateswaran ◽  
Ana Paula Cusolito ◽  
Tatiana Didier
Keyword(s):  
Adjustment Costs ◽  
Developed Countries ◽  
Business Environment ◽  
Capital Allocation ◽  
American Economic Review ◽  
Parameter Estimates ◽  
Firm Level ◽  
Capital Misallocation ◽  
Future Work ◽  
Sources Of Capital

Abstract This paper investigates the sources of capital misallocation across a group of developing and developed countries, using the empirical methodology developed in David and Venkateswaran (2019. “The Sources of Capital Misallocation.” American Economic Review 109 (7): 2531–67). The main findings are: (i) technological frictions—namely, adjustment costs and uncertainty—account for only a modest share of the observed misallocation; (ii) heterogeneity in firm-level technologies potentially explains between one-quarter and one-half, but (iii) dispersion in markups is much smaller; (iv) after accounting for these factors, on average, at least 50 percent of misallocation within each country remains unexplained, suggesting a large role for additional—potentially distortionary—factors. These factors are largely attributable to a component that is correlated with firm size/productivity and one that is essentially permanent to the firm. They exhibit strong negative correlations with income per capita and direct measures of the quality of the business environment from the World Bank Doing Business Report. The paper reports a broad set of moments describing firm-level investment dynamics and detailed parameter estimates on a country-by-country basis with an eye towards future work in this area.

A Comment on the Economics of Labor Adjustment: Mind the Gap: Evidence from a Monte Carlo Experiment

2009 ◽  
Vol 99 (5) ◽  
pp. 2258-2266 ◽  
Author(s):  
Christian Bayer
Keyword(s):  
Cost Model ◽  
Simulated Data ◽  
Adjustment Costs ◽  
Adjustment Cost ◽  
Monte Carlo Experiment ◽  
Dynamic Adjustment ◽  
Employment Decisions ◽  
Firm Level ◽  
Labor Adjustment ◽  
Productivity Process

This comment addresses a point raised in Russell Cooper and Jonathan Willis (2003, 2004), which discusses whether the “gap approach” is appropriate to describe the adjustment of production factors. They show that this approach to labor adjustment as applied in Ricardo J. Caballero, Eduardo Engel, and John C. Haltiwanger (1997) and Caballero and Engel (1993) can falsely generate evidence in favor of nonconvex adjustment costs, even if costs are quadratic. Simulating a dynamic model of firm-level employment decisions with quadratic adjustment costs and estimating a gap model from the simulated data, they identify two factors producing this spurious evidence: approximating dynamic adjustment targets by static ones, and estimating the static targets themselves. This comment reassesses whether the first factor indeed leads to spurious evidence in favor of fixed adjustment costs. We show that the numerical approximation of the productivity process is pivotal for Cooper and Willis's finding. With more precise approximations of the productivity process, it becomes rare to falsely reject the quadratic adjustment cost model due to the approximation of dynamic targets by static ones. (JEL E24, J3)

scholarly journals Growth volatility and size: A firm-level study

2018 ◽  
Vol 90 ◽  
pp. 390-407 ◽  
Author(s):  
Flavio Calvino ◽  
Chiara Criscuolo ◽  
Carlo Menon ◽  
Angelo Secchi
Keyword(s):  
Firm Level ◽  
Growth Volatility

INEFFICIENT BUBBLES AND EFFICIENT DRAWDOWNS IN FINANCIAL MARKETS

2020 ◽  
Vol 23 (07) ◽  
pp. 2050047 ◽  
Author(s):  
MICHAEL SCHATZ ◽  
DIDIER SORNETTE
Keyword(s):  
Rational Expectations ◽  
Rational Expectation ◽  
Asset Price ◽  
Theoretical Background ◽  
Local Martingale ◽  
Management Problem ◽  
Market Failures ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
Hyman Minsky

At odds with the common “rational expectations” framework for bubbles, economists like Hyman Minsky, Charles Kindleberger and Robert Shiller have documented that irrational behavior, ambiguous information or certain limits to arbitrage are essential drivers for bubble phenomena and financial crises. Following this understanding that asset price bubbles are generated by market failures, we present a framework for explosive semimartingales that is based on the antagonistic combination of (i) an excessive, unstable pre-crash process and (ii) a drawdown starting at some random time. This unifying framework allows one to accommodate and compare many discrete and continuous time bubble models in the literature that feature such market inefficiencies. Moreover, it significantly extends the range of feasible asset price processes during times of financial speculation and frenzy and provides a strong theoretical background for future model design in financial and risk management problem settings. This conception of bubbles also allows us to elucidate the status of rational expectation bubbles, which, by design, suffer from the paradox that a rational market should not allow for misvaluation. While the discrete time case has been extensively discussed in the literature and is most criticized for its failure to comply with rational expectations equilibria, we argue that this carries over to the finite time “strict local martingale”-approach to bubbles.

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