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Working papers: [T]=Theory, [E]=Empirical

[E] Banks as Shock Absorbers: Evidence from firms exposed to climate change, 2019, with S. Baumgartner, T. Schober and R. Winter-Ebmer

We analyze the effect of risk on small-firm employment. The analysis is based on a sample of small, family-owned firms exposed to weather risk as a risk of demand shocks. The risk varies over time due to climate change, and it affects the productivity of the firms' employees. By using highly granular data, we can cleanly identify the baseline effect of the risk on employment, as well as modulating effects. We find that the risk causes a stronger reduction in the firms' employment when local banks lack equity capital. Our results are clean evidence that detrimental effects of risk are strongly amplified by financial frictions.

[E/T] The stability of dividends and wages: Effects of competitor inflexibility, 2018, with D. Rettl and J. Zechner.

We analyze how risk sharing between a firm's employees and owners depends on its competitors' response to industry-wide shocks. Focusing on the electricity industry, we obtain a sample of firms with exposure to similar industry risks but different production technologies. We document that firms are more exposed to industry shocks, when their competitors use lower-cost production technologies. 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.

Here is the paper's internet appendix.

[T] Iterated expectations under rank-dependent utility and model consistency, 2015, with M. L. Vierø.

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 Cumulative Prospect Theory (CPT) when a decision maker has to choose between prospects that belong to a comonotonic class. Our conditions characterize the compatibility of a prominent alternative to expected utility with valuation methods that are commonly used in applied economics and finance, e.g. in binomial option pricing. The conditions can be viewed as an impossibility result.