Essays on Financial Economics and Macroeconomics

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Essays on Financial Economics and Macroeconomics

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Title: Essays on Financial Economics and Macroeconomics
Author: Agarwal, Ruchir
Citation: Agarwal, Ruchir. 2012. Essays on Financial Economics and Macroeconomics. Doctoral dissertation, Harvard University.
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Abstract: The first chapter studies mass layoff decisions. Firms in the SP 500 often announce layoffs within days of one another, despite the fact that the average SP 500 constituent announces layoffs once every 5 years. By contrast, similar-sized privately-held firms do not behave in this way. This paper provides a theoretical model and empirical evidence illustrating that such clustering behavior is largely due to CEOs managing their reputation in financial markets. The model's predictions are tested using two novel datasets of layoff announcements and actual mass layoffs. I compare the layoff behavior of publicly-listed and privately-held firms to estimate the impact of reputation-based incentives on cyclicality of layoffs. I find that relative to private firms, public firms are twice as likely to conduct mass layoffs in a recession month. In addition, I find that the firms that cluster layoff announcements at high frequencies are also the ones that are more likely to engage in mass layoffs during recessions. My findings suggest that reputation management is an important driver of layoff policies both at daily frequencies and over the business cycle, and can have significant macroeconomic consequences. In the second chapter I present a theory of the safe assets market and make three central points. First, the quantity of safe assets has a strong influence on equilibrium risk premium and households’ willingness to hold risky assets. Second, the banking system and its regulation largely determine the quantity of safe assets (money-like claims) available to households. Lastly, by regulating banks’ safe asset creation, central bank policy influences risk premium even in a flexible-price world. I show that the optimal central banking policy involves managing risk in the economy, which sometimes calls for large interventions. The third chapter studies the asset allocation decisions of investors and central banks. This chapter identifies the fundamental drivers for these decisions and determines whether their influence has been altered by the global financial crisis and
subsequent low interest rate environment in advanced economies. The fourth chapter analyzes the welfare losses of taxation in a simple dynamic moral hazard model under symmetric information.
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