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Labor leverage, coordination failures, and aggregate risk

Matthieu Bouvard and Adolfo De Motta
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Matthieu Bouvard: TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Adolfo De Motta: McGill University = Université McGill [Montréal, Canada]

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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.

Keywords: Operating leverage; Labor leverage; Coordination failure; Global games; Aggregate risk. (search for similar items in EconPapers)
Date: 2021-01
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Published in Journal of Financial Economics, Elsevier, 2021, 142 (3), pp.1229-1252. ⟨10.1016/j.jfineco.2021.06.036⟩

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DOI: 10.1016/j.jfineco.2021.06.036

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