current projects
Working papers: [T]=Theory,
[E]=Empirical[E/T] The
stability of dividends and wages: Effects of competitor
inflexibility, 2020, with Daniel Rettl and Josef
Zechner.
We analyze how industry-wide risks are shared between
firms' employees and their owners. Focusing on the
electricity generation industry, we study firms which are
subject to similar risks but use different production
technologies. We document that firms are more exposed to
industry shocks when their competitors use lower-cost
production technologies, since this mitigates their response
to negative demand shocks. This "competitor inflexibility"
destabilizes payouts to equityholders, but there is no
evidence that it compromises wage stability. Firms do not
share systematic risk due to competitor inflexibility with
their employees and set wages as if their shareholders' risk
preferences were given.
[E] Bank equity, risk, and small-firm employment: Evidence from firms affected by climate change, 2020, with Simon Baumgartner, Thomas Schober and Rudolf Winter-Ebmer.
We show that the effect of labor productivity risk on small-firm employment depends on the equity capital of local banks. Our analysis is based on a truly quasi-experimental setting. We use highly granular data about a sample of small firms employing workers whose productivity depends on the weather. The data allow us to cleanly identify the causal effect of labor productivity risk on the firms' employment. We find that an increase in the risk of transitory shocks reduces firms' willingness to commit to employing workers. This effect is stronger if local banks have less equity capital. It appears that, by impairing banks' supply of liquidity insurance, a lack of bank equity reduces firms' capacity to take labor productivity risk. Our evidence highlights that bank capitalization matters for economic adaptation to climate change by reducing the effects of increased weather variability on small-firm employment.
This project is also mentioned in an opinion piece I wrote to propose a green view of the prudential regulation of banks: Fridays for Equity
[T] Iterated expectations under rank-dependent expected utility (RDU) and implications for common valuation methods, 2020, with Marie-Louise Vierø.
R&R, under revision.
This paper investigates the applicability of common valuation techniques in finance when the decision maker's preferences can be described by the RDU model. Under expected utility theory, compound lotteries can be valued by iterating expectations: the expected utility of a compound lottery is the expected value of a simple lottery over prizes that are certainty equivalents to follow-up lotteries. We derive necessary and sufficient conditions for a similar valuation technique in the framework of RDU when a consequentialist decision maker has to choose between prospects that belong to a comonotonic class.
[E] Babylonian risk aversion, 2020, with Juliusz Radwanski.
Under revision.
The effects of risk on market prices depend on the risk aversion of market participants. We estimate this risk aversion based on crop prices recorded more than 2000 years ago in Seleucid Babylon. In these data, we find evidence that market participants were risk averse, revealing a degree of risk aversion comparable to today. The evidence suggests that generations in the far future will also price risk as we do in our markets.