CAREER: Firms and the Macroeconomy

Production activities in the world economy do not happen in a vacuum. A majority take place in the context of firms. This project aims to integrate detailed empirical analyses of firms’ operations and financial contracts with higher-level macroeconomic inquiries. Recent developments in the US economy raise many intriguing questions that require such an integration. As a first example, economic activities increasingly rely on nonphysical assets (e.g., intellectual property, software) rather than traditional physical assets (e.g., plants and machinery). What are the implications of this development for firms’ production decisions and financing structure? How might this development affect macroeconomic outcomes? As a second example, the concentration of economic activities in the US economy has been rising (i.e., large firms account for a growing share of the output and production assets in the economy). What underlies the rise of large firms and what are the implications of rising concentration? To better understand firms’ activities in practice, this project will collect original micro data and combine knowledge from different fields (e.g., corporate finance, law, contracts). It will then use the insights from such investigation to study macro implications and potentially shed light on the effects of economic policies. Data collected from primary sources in this research will be shared publicly, and research activities in this project also hope to facilitate communications among researchers in different fields.

The research questions will cover two sets of topics. The first set of questions will focus on firms’ financing activities, especially their ability to borrow. In particular, the traditional account of lending is that firms pledge physical assets, which creditors can seize in default to enforce repayment. However, with the development of legal systems and capital markets, a primary form of corporate debt in the US is based on the cash flows from firms’ operations (not necessarily physical assets). What are the implications of this modern form of corporate debt for the availability of credit for different types of firms, for the growth of firms and the economy, for aggregate productivity and resource allocation, and for economic fluctuations? The second set of questions will study firms’ assets and operations (e.g., the economic effects of intangible assets), as well as the long-run evolution of firms’ activities to put today’s world into perspective. It will also shed light on the landscape of firms (e.g., why some firms are large while others are small), and the formation and evolution of the largest firms that play a key role in the economy. Taken together, the research in this project has two main objectives: 1) uncover key empirical facts about firms’ economic activities, and 2) utilize these facts to inform economic mechanisms and theoretical frameworks.