Keeping Options Open: What Motivates Entrepreneurs?
Using French administrative data on job-creating entrepreneurs, I estimate a life-cycle model in which risk-averse individuals can start businesses and return to paid employment. I estimate that the unobserved benefits of entrepreneurship represent 6,100 pre-tax euros per year (some 15% of profits), which adds up to 67,000 euros over the average entrepreneurial spell. For new entrepreneurs, the option of returning to paid employment is worth 82,000 euros. The main source of option value is not the unobserved heterogeneity in entrepreneurial abilities but rather the random-walk component of productivity. Together, unobserved benefits and this option value explain 42% of firm creations.
Countercyclical Income Risk and Portfolio Choices over the Life-Cycle
R&R at the Review of Financial Studies
I structurally estimate a life-cycle model of portfolio choices that incorporates the relationship between stock market returns and the skewness of idiosyncratic income shocks. The cyclicality of skewness can explain (i) low stock market participation among young households with modest financial wealth and (ii) why the equity share of participants slightly increases until retirement. With an estimated relative risk aversion of 5 and yearly participation cost of $290, the model matches the evolution of wealth, of participation and of the conditional equity share over the life-cycle. Nonetheless, I find that cyclical skewness increases the equity premium by at most 0.5%.
Quantifying Reduced-Form Evidence on Collateral Constraints
While a mature literature shows that credit constraints causally affect firm-level investment, this literature provides little guidance to quantify the economic effects implied by these findings. Our paper attempts to fill this gap in two ways. First, we use a structural model of firm dynamics with collateral constraints, and estimate the model to match the firm-level sensitivity of investment to collateral values. We estimate that firms can only pledge about 19% of their collateral value. Second, we embed this model in a general equilibrium framework and estimate that, relative to first-best, collateral constraints are responsible for 11% output losses.
A Certainty Equivalent Valuation of Social Security Entitlements
This paper studies how US households should value Social Security entitlements. To do so, I set up a continuous time life-cycle model in which the stock and labor markets are cointegrated and Social Security benefits are wage-indexed. Then, I use data from the Survey of Consumer Finances to calibrate relative risk aversion by matching the evolution of equity holdings over the life-cycle. First, I find that the certainty equivalent of Social Security for working households is 46% lower than the sum of future cash flows discounted at the risk-free rate and negative for young households. Second, at the national scale, and taking into account retirees, the risk-adjusted value of Social Security entitlements is 19.6 trillion dollars, which is 37% lower than the unadjusted value of 31 trillion dollars. My findings suggest that the present value of pension entitlements and the transition cost to a funded system may be largely overestimated.
Works in progress:
Cyclical Background Risk and Portfolio Choices: Evidence from Sweden
Using Swedish administrative panel data on individual’s wages and portfolio holdings, we show that countercyclical labor income downside risk reduces households’ willingness to invest in financial market. We start by computing the cross-sectional variance and skewness of wage growth by occupation and year from 2001 to 2013. Then, we show that occupations for which these measures of labor income risk correlate with stock market fluctuations have lower participation rates and invest a smaller share of their financial wealth in risky asset. In line with theoretical predictions, these effects are stronger for individuals with modest financial wealth. Finally, we also show that households invest less in assets whose returns negatively correlates with downside risk in their profession.
Working capital and the growth of new firms