A theory of corporate financial decisions with liquidity and solvency concerns

This paper studies the impact of both liquidity and solvency concerns on corporate finance. I present a tractable model of a firm that optimally chooses capital structure, cash holdings, dividends, and default while facing cash flows with long-term uncertainty and short-term liquidity shocks. The model explains how changes in solvency affect liquidity and also how liquidity concerns affect solvency via capital structure choice. These interactions result in a dynamic cash policy in which cash reserves increase in profitability and are positively correlated with cash flows. The optimal dividend distributions implied by the model are smoothed relative to cash flows. I also find that liquidity concerns lead to a decrease of dispersion of credit spreads.     

Labour Market Adjustments to Financing Conditions under Sectoral Rigidities in the Euro Area

This paper analyses empirically the response of labour market indicators to changing financing conditions in a panel of 15 euro area countries from 1999Q1 to 2015Q4. Using a local projections approach, we estimate impulse responses of three margins of sectoral labour market adjustment – employment, hours worked and real wages. Consistent with recent results in the literature, we find contractionary financing shocks to depress all three indicators of the labour market. Furthermore, responses are asymmetric depending on the sign of the shock, different in magnitude depending on the sectoral composition, and sensitive to labour market institutions such as employment protection legislation and union density. Finally, labour market institutions seem to mainly affect the relative strength of the adjustment margins and not so much the overall response of the wage bill.     

Performance pay and productivity of low- and high-ability workers

Existing literature has mainly focused on analyses of the overall effect of a change in the incentive scheme. Lazear (Lazear, E., 2000, “Performance pay and productivity”, American Economic Review, 90, 1346–1361.), for example, estimates the average increase in productivity after a firm switches from an hourly-wage scheme to a piece-rate plus basic-wage scheme. His paper does not, however, account for the fact that many workers remained within the basic-wage range after the change was made in the incentive scheme. In the present paper we explore how the incentive effect might have been different for those workers seeking the basic wage, and those workers seeking the piece-rate component of the wage. Interestingly, the change in productivity is approximately the same in percentage terms for both types of workers.     

Growth and Renewal in the United States: Retooling America's Economic Engine*

New research by the McKinsey Global Institute (MGI) examines the growth challenge facing the United States and explores how U.S. business and government can contribute to the economy's renewal by reinvigorating their drive toward higher productivity. As baby boomers retire and the female participation rate plateaus, the U.S. economy will receive significantly less lift from increases in the labor force and will have to rely increasingly on productivity gains to fuel growth. The report finds that the United States needs a 34% acceleration in productivity growth if it is to match the GDP growth rates of the past 20 years—and that this is possible. Three‐quarters of the necessary productivity growth acceleration can come from the efforts of private‐sector companies operating within the current regulatory and business environment. Even the best‐performing companies and sectors still have headroom to boost productivity by emulating the best practice of others and tapping into new innovations, and coming up with new innovations of their own. The remaining one‐quarter—and more—can come from government and business working together to address barriers that now limit growth. MGI lays out a seven‐point agenda for action to spur productivity.