The Anatomy of Financial Innovation (with Ana Babus and Matias Marzani) [Paper] New! March 2022
The last three decades have seen rapid growth in the number and variety of securities issued. This paper quantifies innovation in securities, finding that increased variety through specialized new financial products improves firm's ability to raise funds. We develop a model of the allocation of financial products among firms in specific sectors, and estimate that the differential adoption of new financial products, particularly those that are specialized to the financing needs of specific firms, explains most of the observed variation in the amounts of funds raised.
We document that the sales of individual products decline at a steady pace throughout most of their life cycles, mostly because the appeal of products declines with age. Our empirical and model-based results are consistent with products quickly becoming obsolete as they face competition from newer products of competing firms (business stealing) and from newer products of the same firm (cannibalization). [This paper was previously circulated as ''How do firms grow? The life cycle of products matters''.]
We present a theory of firm size, where both scope and expertise are chosen endogenously. The extent to which expertise is scalable (applicable to multiple products), as opposed to local (specific to a particular product), is also chosen by the firm. We use data on multi-product and multi-establishment firms, and provide empirical evidence in support of the model's predictions.
How do Entrant Build Market Share? The Role of Demand Frictions (with David Argente, Doireann Fitzgerald, and Anthony Priolo) [Paper] March 2021
We investigate an explanation for firm growth based on frictions in the accumulation of customers, across and within markets segmented by geography. We use matched retail scanner and advertising data to show that entrants grow both by adding customers in new markets and by reaching new customers in continuing markets. Growth in market share within markets is not associated with changes in markups, but is associated with marketing and advertising. We estimate a structural model and find that frictions in the accumulation of customers contribute substantially to heterogeneity in firm size, and to the gradual process of firm growth.
We construct a new patent-to-product dataset combining unique patent and product data, and document that: (i) there is a substantial amount of product innovation that comes from firms that have never patented; (ii) patents of large firms have a weaker association with the quality and quantity of product innovations, consistent with the hypothesis that market leaders are more likely to use patents to deter innovation by competing firms.
Firm Dynamics, Persistent Effects of Entry Conditions, and Business Cycles [Paper] April 2018
I provide new evidence that businesses born in downturns start on a smaller scale and remain smaller over their entire lifecycle, and no evidence that these differences attenuate even long after entry. Using data on the productivity and composition of startup businesses, I show that this persistence is related to selection at entry and demand-side channels. I build a model of firm dynamics that shows that when I mute the effects of selection mechanisms, the average initial size differences are more procyclical, but they are less persistent over time.
We use detailed product- and firm-level data to study the sources of innovation over the period from 2007 to 2013. We document that: (i) entry and exit of products is prevalent among different types of firms; (ii) most reallocation of products occurs within the boundaries of the firm; (iii) product reallocation is strongly pro-cyclical and declined by more than 25 percent during the Great Recession.
Product Innovation and Credit Market Disruptions (with João Granja), [Paper] April 2022
Forthcoming at Review of Financial Studies.
We provide new evidence that disruptions in firm’s access to credit during the Global Financial Crisis of 2008 had significant effects on product innovation in the consumer-goods sector.
The Life Cycle of Businesses and Their Internal Organization (with Elizabeth Weber Handwerker and David Piccone), American Economic Review, Papers and Proceedings, 2021, 111:587-592 [Paper]
We document new stylized facts on the occupational mix of businesses in the U.S. and on how their internal organization evolves over their life cycles. Our main empirical finding is that younger businesses have fewer hierarchical layers and span of control than comparable older businesses. Our results suggest that businesses become more hierarchical and increase their managerial span of control over their life cycles. We show that this pattern is not entirely driven by selection or differences in size and is pervasive across cohorts and sectors.
The Occupational Mix of New Businesses (with Elizabeth Weber Handwerker and David Piccone)