Andrea L. Eisfeldt
Research
Publications:
“Endogenous
Liquidity in Asset Markets.”
Journal of Finance, February
2004, 59 1-30. (Lead Article). Awarded Smith Breeden Distinguished Paper
Award.
(The working
paper contains additional comparative statics and details.)
This paper analyzes a model in
which long-term risky assets are illiquid due to adverse selection. The degree of adverse selection and hence the
liquidity of these assets is determined endogenously by the amount of trade for
reasons other than private information.
I find that higher productivity leads to increased liquidity. Moreover, liquidity magnifies the effects of
changes in productivity on investment and volume. High productivity implies that investors
initiate larger scale risky projects which increases the riskiness of their
incomes. Riskier incomes induce more
sales of claims to high quality projects, causing liquidity to increase.
“Capital Reallocation and Liquidity.”
(with Adriano
Rampini.)
Journal of Monetary Economics, April 2006,
369-399. (Lead Article).
This paper shows that the amount of capital reallocation between firms is procyclical. In contrast, the benefits to capital reallocation appear countercyclical. We measure the amount of reallocation using data on flows of capital across firms and the benefits to capital reallocation using several measures of the cross sectional dispersion of the productivity of capital. We then study a calibrated model economy where capital reallocation is costly and impute the cost of reallocation. We find that the cost of reallocation needs to be substantially countercyclical to be consistent with the observed joint cyclical properties of reallocation and productivity dispersion.
“Smoothing with Liquid and Illiquid Assets.”
Journal of Monetary Economics, September 2007, 1572-1586.
(Supplementary appendix.)
A quantitative examination of
the demand for liquid assets arising from consumption smoothing motives reveals
that such demand is very low. Consumers faced with income streams calibrated to
match income and unemployment data and returns and transactions costs
calibrated to match US Treasury Bill data almost exclusively buy and hold
illiquid long term assets even though the return premium on long term assets is
quite small. This is because, with standard preferences, savings are highly
persistent even when risky income is not. In the calibrated model, the first
order autocorrelation of savings is an order of magnitude larger than that of
income.
“New or Used? Investment with Credit Constraints.” (with Adriano Rampini.)
Journal of Monetary Economics, November 2007, 2656-2681.
(Supplementary appendix.)
Used capital is cheap up front but requires higher
maintenance payments later on. We argue that the timing of these investment
cash outflows makes used capital attractive to financially constrained firms,
since it is cheap when evaluated using their discount factor. In contrast, it
may be expensive from the vantage point of an unconstrained agent. We provide
an overlapping generations model and determine the price of used capital in
equilibrium. Agents with less internal funds are more credit constrained,
invest in used capital, and start smaller firms. Empirically, we find that the
fraction of investment in used capital is substantially higher for small firms
and varies significantly with measures of financial constraints.
“Managerial Incentives, Capital Reallocation, and the Business Cycle.” (with Adriano Rampini.)
Journal of Financial
Economics, January 2008, 177-199.
This paper argues that when
managers have private information about how productive assets are under their
control and receive private benefits, substantial bonuses are required to
induce less productive managers to declare that capital should be reallocated.
Moreover, the need to provide incentives for managers to let go links aggregate
capital reallocation to executive compensation and turnover over the business
cycle. Capital reallocation and managerial turnover are procyclical if promised
managerial compensation increases with the number of managers hired. The agency
problem between owners and managers makes bad times worse because capital is
less productively deployed when agency costs render reallocation too costly.
Empirically we find that both CEO turnover and executive compensation are
remarkably procyclical.
“Leasing, Ability to Repossess, and Debt Capacity.” (with Adriano Rampini.)
Forthcoming, Review of
Financial Studies.
This paper studies the role of leasing of productive assets. When capital is leased (or rented), it is more easily repossessed and hence leasing relaxes financing constraints. However, leasing gives rise to an agency problem with regard to the care with which the leased asset is used or maintained. We show that this implies that more credit constrained firms lease capital, while less credit constrained firms buy capital. Our theory is consistent with the explanation of leasing provided by leasing firms, namely that leasing “preserves capital,” which is generally considered a fallacy in the academic literature. We provide empirical evidence that small and credit constrained firms lease a considerably larger fraction of their capital than larger and less constrained firms.
Working Papers:
“Financing Shortfalls and the Value of Aggregate Liquidity.”
(with Adriano
Rampini.)
Last revised January 2007.
This paper studies the level and dynamics of the value of aggregate liquidity induced by firms’ financing shortfalls. We model liquidity and cash flows as internal funds available for investment in an economy where external funds are costly. We study whether the use of liquidity to hedge investment opportunities can generate substantial liquidity premia with empirically observed countercyclical properties, and show how firms’ financial positions affect the value of aggregate liquidity. Cash flows affect the “natural supply” of liquidity and are procyclical. Thus, we argue that shortfalls between firms’ financing needs and available liquid funds are more likely to occur in bad times when current cash flows are low, rendering liquidity premia countercyclical. We investigate the relationship between such shortfalls and the value of aggregate liquidity empirically using US Flow of Funds and Compustat data.
“Colonies.” (with Matthias Doepke.) Last revised
January 2007.
In many developing countries, the institutional framework governing economic life has its roots in the colonial period, when the interests of European settlers clashed with those of the native population or imported slaves. We examine the economic implications of this conflict in a framework where institutions are represented by the number of people with property-rights protection, i.e., “gun owners.” In the model, gun owners can protect their own property, they can exploit others who do not own guns, and they may decide to extend property rights by handing out guns to previously unarmed people. The theory generates a “reversal of fortune” between colonies with many and few oppressed: income per capita is initially highest in colonies with many oppressed that can be exploited by gun owners, but later on excessive concentration of economic power becomes a hindrance for development.
Work in
Progress:
“Measuring Capital Reallocation.” (Joint with Adriano Rampini.) Related
proposal to access
Conferences Organized: Financial Constraints or
Technological Differences? April 28-30,
2006
Kellogg World: Kellogg World Article: Liquidity
Kellogg World Article: Capital Motivations