Investment in organization capital

We study a firm’s investment in organization capital by analyzing a dynamic model of language development and intrafirm communication. We show that firms with richer internal language (i.e., more organization capital) have lower employee turnover, and higher diversity in skill and wages among incumbents who are promoted from within the firm. Our results also suggest that firms in rapidly changing industries are less likely to invest in organization capital, and are more likely to have high managerial turnover. Finally, our model shows that employment protection regulations lead to more investment in organization capital but less innovation.     

Rational Beliefs and Security Design

This article studies the security-design problem of a cash-constrainedfirm facing investors with diverse beliefs. Investor "rationalbeliefs" are modeled as varying and yet rational in the senseof Kurz (1994a). With two investors, optimal designs are similarunder rational beliefs and rational expectations. With manyinvestors, however, optimal securities under rational beliefsmaximize investor differences of opinion, while under rationalexpectations optimal designs minimize disagreements. We demonstratethat the common practice of issuing multiple securities backedby a single asset is optimal under rational beliefs but notunder rational expectations. Researching market beliefs cancreate substantial value for firms.     

Production in Entrepreneurial Firms: The Effects of Financial Constraints on Labor and Capital

I model the contrasting capital-labor decisions of financiallyconstrained and unconstrained firms. I show that financiallyrestricted firms use relatively more labor than physical capitalbecause informed employees provide more efficient financingthan uninformed capital suppliers. I demonstrate that constrainedfirms cannot easily attract new employees to replace existingstaff. Their greater employee retention aligns owner-workerincentives and encourages workers to make firm-specific investments.Constrained firms, however, gradually suffer from their inabilityto replace low-quality workers, such that their relative laborproductivity decreases over time. Empirical tests utilizinginstrumental variables confirm several implications of the theory.     

Confronting Information Asymmetries: Evidence from Real Estate Markets

There are relatively few direct tests of the economic effectsof asymmetric information because of the difficulty in identifyingexogenous information measures. We propose a novel exogenousmeasure of information based on the quality of property taxassessments in different regions and apply this to the U.S.commercial real estate market. We find strong evidence thatinformation considerations are significant. Market participantsresolve information asymmetries by purchasing nearby properties,trading properties with long income histories, and avoidingtransactions with informed professional brokers. The evidencethat the choice of financing is used to address informationconcerns is mixed and weak.     

Informal Financial Networks: Theory and Evidence

We develop a model of informal financial networks and presentcorroborating evidence by studying the role of property brokersin the U.S. commercial real estate market. Our model demonstratesthat service intermediaries, who do not themselves supply loans,can facilitate their clients' access to finance through informalrelationships with lenders. Empirically we find that, controllingfor endogenous broker selection, hiring a broker strikinglyincreases the probability of obtaining bank finance. Our resultsdemonstrate that even in the United States, with its well-developedcapital markets, informal networks play an important role incontrolling access to finance.