How important is financial development for economic development? A costly state verification model of financial intermediation is presented to address this question. The model is calibrated to match facts about the U.S. economy, such as the intermediation spreads and the …firm-size distributions for 1974 and 2004. It is then used to study the international data using cross-country interest-rate spreads and per-capita GDPs. The analysis suggests a country like Uganda could increase its output by 116 percent if it could adopt the world’s best practice in the financial sector. Still, this amounts to only 29 percent of the gap between Uganda’s potential and actual output.

Code and data files for "Quantifying the Impact of Financial Development on Economic Development"

Whether a CEO manages the innovation efforts of the firm in line with shareholder preferences has a substantial impact on market value and firm growth, which in turn influence aggregate productivity growth and welfare. Using data on U.S. public firms, we find that (i) firms with better corporate governance tend to adopt highly incentivized contracts rich in stock options; and (ii) such contracts are more likely to lead to disruptive innovations -- patented inventions that are in the upper tail of the distribution in terms of quality and originality. We develop and estimate a new dynamic general equilibrium model of firm-level innovation with agency frictions and endogenous determination of executive contracts. The model is used to study the joint dynamics of corporate governance, managerial compensation, and disruptive innovations. Better corporate governance can reduce the influence of the CEO in the determination of the compensation structure. This leads to more incentivized contracts and boosts innovation, with substantial benefits for the shareholders, as well as the broader economy through knowledge spillovers. Shutting down the agency frictions leads to an increase in long-run output growth, which translates into a significant welfare gain in consumption equivalent terms.

Corporate Governance, Managerial Compensation, and Disruptive Innovations

argument in favor of the Tax Cuts and Jobs Act of 2017. Barro and Furman (2018) predicted that the act would boost gross domestic product (GDP) by 1.1 percentage points per year in 2018 and in 20192 but that most of the boost will disappear quickly, decreasing to only 0.2 percentage points annually after 10 years. In this essay, I argue that data on innovation and activities funded by venture-capital (VC) show the permanent impact of tax cuts on growth—given that the tax cuts remain. Most of the analysis will draw from my recent working paper “Financing Ventures: Some Macro economics,” written with Jeremy Greenwood and Pengfei Han.3

/pdf/tax-cuts-venture-capital-and-long-term-growth-9zq757ogt3.pdf

Tax Cuts, Venture Capital, and Long-Term Growth

The relationship between venture capital and growth is examined using an endogenous growth model incorporating dynamic contracts between entrepreneurs and venture capitalists. At each stage of financing, venture capitalists evaluate the viability of startups. If viable, venture capitalists provide funding for the next stage. The success of a project depends on the amount of funding. The model is confronted with stylized facts about venture capital; viz., statistics by funding round concerning the success rates, failure rates, investment rates, equity shares, and IPO values. Raising capital gains taxation reduces growth and welfare.

/pdf/financing-ventures-some-macroeconomics-y35goz1y2b.pdf

Pengfei Han

Papers

Financing Ventures: Some Macroeconomics