Essays in Financial Economics

In the first chapter, I use a simple decomposition to distinguish between (a) inequality driven by wealth accumulation by old money, and (b) that driven by the entry of new money into the top of the wealth distribution. I make use of administrative real estate holdings data and hand-collected genealogies to create a novel panel dataset of wealth spanning 1982 through 2018. I find that (i) the contribution of new money is large, and (ii) this contribution increases with horizon. Over 80 percent of the increase in wealth inequality is attributable to new money households. Many theories of inequality explain the rapid increase in wealth inequality; relatively few can explain the relative importance of new money.� I present a parsimonious model featuring market incompleteness and innovative young firms that is able to match both these moments while also generating additional asset pricing predictions.� In the model, inequality increases not because the rich get richer, but because of the emergence of fast-growing young firms.In the second chapter (with Sebastian Gryglewicz and Barney Hartman-Glaser),I address a puzzling stylized fact of executive compensation: Firms with better investment opportunities tend to have lower levels of managerial incentives. Managerial incentives are measured as pay-performance-sensitivity, the change in the manager’s compensation for a 1 percent increase in firm value. While it seems odd that increased opportunities do not coincide with stronger managerial incentives, I write down a theoretical model in which this pattern naturally emerges. The result hinges on two important ingredients: the manager exerts costly, unobservable effort to improve the firm; and the manager is more risk averse than the investor. In the model, the firm’s manager can exert effort to improve firm value, but this effort is costly to the manager. Thus, there are direct costs of effort, which come from incentivizing the manager to work hard, as well as indirect costs of effort, which come from the manager’s risk aversion. Our model contributes to the literature on executive compensation by rationalizing a puzzling stylized fact using a parsimonious contracting model. This article has been published in Management Science.In the third chapter (with Bruno Pellegrino), I ask the question: How much can a country grow its economy via better allocation of labor and capital? A robust prediction of neoclassical economics is that, in a market economy, labor and capital should flow to its best users. However, in the data, some firms seem to be using labor and physical capital very productively, while others squander these resources. The contribution of this chapter is to ask how much of this variation in productivity can be attributed to differences in managerial expectations.Using a novel dataset in which managers of over 8,000 European firms report on the constraints faced by their firms, I construct a dataset in which managerial expectations and accounting variables are jointly observed. I consider four different types of constraints: bureaucratic regulation, nepotism, limited access to financial capital, and labor market frictions in hiring workers. Building on prior theoretical work in Industrial Organization and Macro-economics, I develop a model that allows me to estimate the difference in productivity between constrained firms and their unconstrained counterparts using firm-level accounting and survey data. I find managers’ expectations of financial constraints act like a 26 percent tax on physical capital in Spain, and that nepotism in Hungary and Spain acts like a 2 percent tax on firm profits. Taken together, these suggest that better allocation of resources could grow these economies by several percentage points. The amelioration of these frictions represent low hanging fruit for policy makers interested in promoting economic growth