Tobin's Q and Inequality
SSRN link (first version Oct 12, 2017)
Slides (presentation at the Washington Center for Equitable Growth. May, 2018)
Abstract: Since the early 1980s, aggregate equity Tobin's Q has experienced a secular increase in the US, as equity wealth and corporate physical capital have followed divergent trajectories. During the same period, labor productivity and wages have significantly decoupled, leading to a decline in the U.S. corporate labor share. We build an incomplete markets model with heterogeneous agents with financial assets, capital taxation and monopoly rents that explains the connection between these phenomena. Our model is consistent with several stylized facts of the U.S. economy since 1980. The joint evolution of capital taxation and the rise of monopoly rents explain the decrease in investment flows and the observed rise in asset prices. Wage-productivity decoupling is the natural response not only to the rise of rents, but also to investment sluggishness when capital and labor are complements. Our model also explains the historical upsurge of equity returns. By explicitly modelling the interaction between monopoly rents and different capital taxes, our framework sheds new light on the recent debate on capital taxation in the U.S. and elsewhere. We show that the secular increase in the relative value of financial wealth had strong effects in general equilibrium, rendering a more unequal market allocation of income. These secular trends in taxes and market structure have reduced welfare. This is because the increase of financial wealth, which is mostly experienced by the richest households, has occurred at the expense of corporate investment and labor earnings, which are the main source of income for a large portion of the population.
The Global Rise of Asset Prices and the Decline of the Labor Share (with Pedro Trivín, UoG)
PDF (new version!)
Slides (presentation at the Washington Area International Finance Symposium. April 2019)
The labor income share has been decreasing across countries since the early 1980s, sparking a growing literature about the causes of this trend (Karabarbounis and Neiman, 2014; Piketty and Zucman, 2014; among many others). At the same time, there has been a steady increase in asset prices. We build a simple model to argue that the increase in the value of financial assets crowds out capital formation. The negative impact of asset prices on the capital-output ratio contributes to decline of the labor share if capital and labor are aggregate complements. Based on a common factor model, we find that this mechanism can account for up to 57\% of the labor share decline. We highlight three potential factors that operate through the same theoretical channel: capital income taxes, capitalized market power rents and corporate governance frictions.
Work in progress
Debt Deleveraging, Default and Credit Rationing (with Arnau Valladares-Esteban, USouthampton)
(draft coming soon)
Abstract: We model an heterogenous-agents economy with financial intermediation where a single negative shock to the borrowing capacity of households induces a simultaneous fall of the demand and supply of credit. As in Lorenzoni and Guerrieri (2011), the unexpected shock forces constrained consumers to deleverage whereas unconstrained consumers increase their precautionary savings, depressing the aggregate demand of credit and the savings interest rate. In our model, some consumers decide to deleverage by defaulting on their debt, transferring the debt burden to the financial intermediary. If the wave of defaults is sufficiently large, the financial intermediary becomes capital constrained and is forced to rise the credit spreads and to cut the supply of credit. The resulting credit rationing prevents firms from increasing the labor demand. The result is a single-shock crisis episode driven simultaneously by the shortage of demand and supply of credit. We argue that this is the kind of credit crisis that, in the aftermath of the financial crisis, countries like the U.S. or Spain have suffered.