Labor leverage, coordination failures, and aggregate risk
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| Pubblicato in: | IDEAS Working Paper Series from RePEc (2021), p. n/a |
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Federal Reserve Bank of St. Louis
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| Accesso online: | Citation/Abstract Full text outside of ProQuest |
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| Abstract: | This paper studies an economy where demand spillovers make firms’ production decisions strategic complements. Firms choose their operating leverage trading off higher fixed costs for lower variable costs. Operating leverage governs firms’ exposures to an aggregate labor productivity shock. In equilibrium, firms exhibit excessive operating leverage as they do not internalize that an economy with higher aggregate operating leverage is more likely to fall into a recession following a negative productivity shock. Welfare losses coming from firms’ failure to coordinate production are amplified by suboptimal risk-taking, which magnifies the impact of productivity shocks onto aggregate output. |
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| Fonte: | ABI/INFORM Global |