We examine the dynamic relation between firm leverage buildups and real economic activity using U.S. establishment-, firm-, and region-level data. We find that buildups in firm leverage are predictably associated with boom-bust growth cycles: employment grows in the short run but declines in the medium run. While firm leverage buildups are correlated with firm-level expansions, they continue to predict negative future employment growth if we control for firm-level expansions. Buildups in firm leverage predict a tightening of future firm-level financing constraints, and they only predict negative future employment growth if the level of firm leverage is sufficiently high, suggesting that the dynamic relation between firm leverage buildups and employment growth operates through a financial fragility channel. Our results have aggregate implications: regions with larger buildups in firm leverage experience stronger regional boom-bust growth cycles, and they perform significantly worse during national recessions.

This paper argues that banks must be sufficiently levered to have first-best incentives to make new risky loans. This result, which is at odds with the notion that leverage invariably leads to excessive risk taking, derives from two key premises that focus squarely on the role of banks as informed lenders. First, banks finance projects that they do not own, which implies that they cannot extract all the profits. Second, banks conduct a credit risk analysis before making new loans. Our model may help understand why banks take on additional unsecured debt, such as unsecured deposits and subordinated loans, over and above their existing deposit base. It may also help understand why banks and finance companies have similar leverage ratios, even though the latter are not deposit takers and hence not subject to the same regulatory capital requirements as banks.

Financial regulators and investors have expressed concerns about high pay inequality within firms. Using a proprietary data set of public and private firms, this paper shows that firms with higher pay inequality—relative wage differentials between top- and bottom-level jobs—are larger and have higher valuations and stronger operating performance. Moreover, firms with higher pay inequality exhibit larger equity returns and greater earnings surprises, suggesting that pay inequality is not fully priced by the market. Our results support the notion that differences in pay inequality across firms are a reflection of differences in managerial talent. Received March 14, 2016; editorial decision January 21, 2017 by Editor Itay Goldstein.

The gains from agglomeration economies are believed to be highly localized. Using confidential Census plant‐level data, we show that large industrial plant openings raise the productivity not only of local plants but also of distant plants hundreds of miles away, which belong to large multi‐plant, multi‐region firms that are exposed to the local productivity spillover through one of their plants. This “global” productivity spillover does not decay with distance and is stronger if plants are in industries that share knowledge with each other. To quantify the significance of firms' plant‐level networks for the propagation and amplification of local productivity shocks, we estimate a quantitative spatial model in which plants of multi‐region firms are linked through shared knowledge. Counterfactual exercises show that while large industrial plant openings have a greater local impact in less developed regions, the aggregate gains are greatest when the plants locate in well‐developed regions, which are connected to other regions through firms' plant‐level (knowledge‐sharing) networks.

We examine the rise in student loan defaults in the Great Recession by linking administrative student loan data at the individual borrower level to student loan borrowers’ individual tax records. A Blinder-Oaxaca style decomposition shows that shifts in the composition of student loan borrowers and the massive collapse in home prices during the Great Recession can each account for approximately 30% of the rise in student loan defaults. Falling home prices affect student loan defaults by impairing individuals’ labor earnings, especially for low income jobs. By contrast, when comparing the default sensitivities of homeowners and renters, we find no evidence that falling home prices affect student loan defaults through a home equity-based liquidity channel. The Income Based Repayment (IBR) program introduced by the federal government in the wake of the Great Recession reduced both student loan defaults and their sensitivity to home price fluctuations, thus providing student loan borrowers with valuable insurance against negative shocks.

This paper shows that active investors, such as venture capitalists, can affect the speed at which new ventures grow. In the absence of product market competition, new ventures financed by active investors grow faster initially, though in the long run those financed by passive investors are able to catch up. By contrast, in a competitive product market, new ventures financed by active investors may prey on rivals that are financed by passive investors by “strategically overinvesting” early on, resulting in long-run differences in investment, profits, and firm growth. The value of active investors is greater in highly competitive industries as well as in industries with learning curves, economies of scope, and network effects, as is typical for many “new economy” industries. For such industries, our model predicts that start-ups with access to venture capital may dominate their industry peers in the long run.

We discuss firm-level evidence based on UK data showing that within-firm pay inequality--wage differentials between top- and bottom-level jobs--increases with firm size. Moreover, within-firm pay inequality rises as firms grow larger over time. Lastly, using wage data from 15 developed countries, we document a positive association between aggregate wage inequality at the country level and growth by the largest firms in the country. We conclude that part of what may be perceived as a global trend toward more wage inequality may be driven by an increase in the size of the largest firms in the economy.

ABSTRACT We report evidence from a randomized field experiment conducted by a major student loan servicer, Navient, in which student loan borrowers received prepopulated applications for income‐driven repayment (IDR) plans. Treatment increased IDR enrollment by 34 percentage points relative to the control group. Using the random treatment assignment as an instrument for IDR enrollment, we furthermore provide local average treatment effect (LATE) estimates of the effects of IDR enrollment on new delinquencies, monthly student loan payments, and consumer spending. Our study is the first field‐experimental evaluation of a U.S. government program designed to address the soaring debt burdens of U.S. households.

ABSTRACT We examine the role of security design when lenders make inefficient accept or reject decisions after screening projects. Lenders may be either “too conservative,” in which case they reject positive‐NPV projects, or “too aggressive,” in which case they accept negative‐NPV projects. In the first case, the uniquely optimal security is debt. In the second case, it is levered equity. In equilibrium, profitable projects that are relatively likely to break even are financed with debt, while less profitable projects are financed with equity. Highly profitable projects are financed by uninformed arm's‐length lenders.