Aggregate Dynamics in Lumpy Economies

How does an economy's capital respond to aggregate productivity shocks when firms make lumpy investments? We show that capital's transitional dynamics are structurally linked to two steady‐state moments: the dispersion of capital to productivity ratios—an indicator of capital misallocation—and the covariance of capital to productivity ratios with the time elapsed since their last adjustment—an indicator of asymmetric costs of upsizing and downsizing the capital stock. We compute these two sufficient statistics using data on the size and frequency of investment of Chilean plants. The empirical values indicate significant effects of aggregate productivity shocks and favor investment models with a strong downsizing rigidity and random opportunities for free adjustments.

Responsibility Centers, Decision Rights, and Synergies

ABSTRACT We consider the optimal allocation of decision rights over noncontractible specific investments. Risk-averse business unit managers each engage in general (stand-alone) operations and invest in joint projects that benefit their own and other divisions. Which of the managers should have the authority to choose these investments? With scalable investments, we show that decision rights should be bundled in the hands of the manager facing the more volatile environment. With discrete (lumpy) investments, on the other hand, decision rights should be split between the managers, provided they face comparable levels of uncertainty in their general operations. Splitting decision rights better leverages the inherent investment complementarity, counter to conventional wisdom. Our model generates empirical predictions for the equilibrium association of organizational structure and managers' incentive contracts: bundling of decision rights results in pay-performance sensitivity (PPS) divergence across divisions; splitting them results in PPS convergence. JEL Classifications: M41; D23; D86.

Manufacturing and Services Growth in Developing Economies: ‘Too Little’ Finance?

This article explores the relationship between financial development and growth in manufacturing and service sectors in 77 developing economies over the period 1984–2013. Specifically, we examine whether the size of the financial sector matters and if it does, whether the size of the financial sector in these countries is of a sufficient scale for credit and liquidity expansion to benefit the economy. Using the two-step system generalized method of moments, we find a u-shaped relationship between either manufacturing or services growth and financial size, indicating that a critical level of financial scale has to be achieved for financial expansion to positively affect the growth. For some 50%–90 per cent of the economies in the sample, there is a robustly long-run adverse effect of financial expansion on both manufacturing and services growth, indicating a case of ‘too little’ finance, likely explained by a combination of weak institutions, market failures and the existence of large and lumpy investments that require sufficient financial scale.