Accounting and Finance Seminars: Adolfo de Motta (McGill)

13 February 2019, 1.00 PM - 13 February 2019, 2.15 PM

Adolfo de Motta

G.15, 15-19 Tyndalls Park Road

Title: Risk Taking and Coordination Failures

Abstract:

We study an economy where demand spillovers make rms' production decisions strate- gic complements. Firms have access to an increasing returns to scale technology and choose their operating leverage ex ante trading o higher xed costs for lower variable costs. Op- erating leverage governs rms exposures to an aggregate labor productivity shock, the only source of uncertainty in the economy. In equilibrium, rms' operating leverage is too high because they do not internalize that an economy with higher aggregate leverage is more likely to fall into a self-ful lling equilibrium with ineciently low output after a bad pro- ductivity shock. Welfare losses coming from rms' failure to coordinate production ex post are amplied by suboptimal risk-taking ex ante. Excessive operating leverage contributes to systematic risk by magnifying the impact of productivity shocks onto aggregate output.

Contact information

https://www.mcgill.ca/desautels/adolfo-de-motta

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