Working Papers
Working Papers
Abstract: How does venture capital (VC) financing help the growth of startup firms and impact aggregate output and consumption? Motivated by the substantial growth and upfront investment of VC-backed firms observed in administrative US Census data, this paper develops a firm dynamics model over the life cycle that centers on ex-ante heterogeneity in growth potential, innovation investment, and external financing. In the model, startups choose the source of financing from VC, Angel investors, and banks, where financial frictions arise from bank default costs and costs of raising equity. VC-backed firms achieve substantial growth as a result of endogenous sorting, equity-based funding, and managerial advice. The calibrated model implies that venture capitalists' advice accounts for around 22% of the growth of VC-backed firms. A counterfactual economy without VC financing would lose aggregate consumption by around 0.4%.
Abstract: In this paper, we study the neoclassical growth model with idiosyncratic income risk and aggregate risk in which risk sharing is endogenously constrained by one-sided limited commitment. Households can trade a full set of contingent claims that pay off depending on both idiosyncratic and aggregate risk, but limited commitment rules out that households sell these assets short. The model results, under suitable restrictions of the parameters of the model, in partial consumption insurance in equilibrium. With log-utility and idiosyncratic income shocks taking two values, one of which is zero (e.g., employment and unemployment), we show that the equilibrium can be characterized in closed form, despite the fact that it features a non-degenerate consumption and wealth distribution. We use the tractability of the model to study, analytically, inequality over the business cycle and asset pricing, and derive conditions under which our model has identical, as well as conditions under which it has lower/higher risk premia than the corresponding representative agent version of the model.
Abstract: How do advanced technology adoption and venture capital (VC) funding impact employment and growth? An analysis of data from the US Census Bureau suggests that while both advanced technology use and VC funding matter on their own for firm outcomes, their joint presence is most strongly correlated with higher employment levels. VC presence is linked with a high increase in employment, though primarily among a limited subset of firms. In contrast, technology adoption is associated with a smaller rise in employment, yet it influences a considerably larger number of firms. A model of startups is created, focusing on decisions to use advanced technology and seek VC funding. The model is compared with firm-level data on employment, advanced technology use, and VC investment. Several thought experiments are conducted using the model. Some experiments assess the importance of advanced technology and VC in the economy. Others examine the reallocation effects across firms with different technology choices and funding sources in response to shifts in taxes and subsidies.
Abstract: R&D investment has grown robustly, yet aggregate productivity growth has stagnated. Is this because "ideas are getting harder to find"? This paper uses micro-data from the US Census Bureau to explore the relationship between R&D and productivity in the manufacturing sector from 1976 to 2018. We find that both the elasticity of output (TFP) with respect to R&D and the marginal returns to R&D have risen sharply. Exploring factors affecting returns, we conclude that R&D obsolescence rates must have risen. Using a novel estimation approach, we find consistent evidence of sharply rising technological rivalry. These findings suggest that R&D has become more effective at finding productivity-enhancing ideas but these ideas may also render rivals' technologies obsolete, making innovations more transient.
Work in Progress
Abstract: Recent evidence suggests that R&D obsolescence rates have risen (Ando, Bessen, and Wang 2025). How does rising obsolescence affect productivity growth? This paper presents a growth model where technological opportunities of varied quality arrive exogenously for both new products and replacement products. Researchers choose which opportunities are feasible to develop. We show that since expected rents are greater for replacement innovations than for new product innovations of comparable quality because of business stealing, the average replacement innovation has lower quality than the average new product innovation. As a result, replacement innovations contribute less to aggregate productivity, and a shift toward more replacement (higher obsolescence) can reduce productivity growth substantially for a significant period.