Abel, Andrew, 1982, “Dynamic effects of permanent and temporary tax policies in a q model of investment,” Journal of Monetary Economics, Vol. 9, No. 3, pp. 353–373.
M. Harris, and R. M. Stulz (eds.), Handbook of the Economics of Finance, Handbook of the Economics of Finance, Vol. 1, chap. 7, pp. 337–429 (Elsevier).
Angelini, Paolo, and Andrea Generale, 2008, “On the Evolution of Firm Size Distributions,” American Economic Review, Vol. 98, No. 1, pp. 426–38.
Atkenson, Andrew, Aubhik Khan, and Lee Ohanian, 1996, “Are data on industry evolution and gross job turnover relevant for macroeconomics?” Vol. 44, pp. 215–250.
Atkeson, Andrew, and Patrick J Kehoe, 2005, “Modeling and measuring organization capital,” Journal of Political Economy, Vol. 113, No. 5, pp. 1026–1053.
Bassetto, Marco, Marco Cagetti, and Mariacristina De Nardi, 2015, “Credit Crunches and Credit Allocation in a Model of Entrepreneurship,” Review of Economic Dynamics, Vol. 18, No. 1, pp. 53–76.
Basu, Susanto, and John G Fernald, 1997, “Returns to Scale in U.S. Production: Estimates and Implications,” Journal of Political Economy, Vol. 105, No. 2, pp. 249–283.
Beck, Thorsten, Asli Demirguc-Kunt, and Vojislav Maksimovic, 2005, “Financial and Legal Constraints to Growth: Does Firm Size Matter?” The Journal of Finance, Vol. 60, No. 1, pp. 137–177.
Burnside, Craig, 1996, “Production function regressions, returns to scale, and externalities,” Journal of Monetary Economics, Vol. 37, No. 2-3, pp. 177–201.
Clementi, Gian Luca, and Berardino Palazzo, 2016, “Entry, Exit, Firm Dynamics, and Aggregate Fluctuations,” American Economic Journal: Macroeconomics, Vol. 8, No. 3, pp. 1–41.
Cooper, Russell W, and John C Haltiwanger, 2006, “On the nature of capital adjustment costs,” The Review of Economic Studies, Vol. 73, No. 3, pp. 611–633.
Djankov, Simeon, Tim Ganser, Caralee McLiesh, Rita Ramalho, and Andrei Shleifer, 2010, “The Effect of Corporate Taxes on Investment and Entrepreneurship,” American Economic Journal: Macroeconomics, Vol. 2, No. 3, pp. 31–64.
Dunne, Timothy, Mark J. Roberts, and Larry Samuelson, 1988, “Patterns of Firm Entry and Exit in U.S. Manufacturing Industries,” The RAND Journal of Economics, Vol. 19, No. 4, pp. pp. 495–515.
Feldstein, Martin, Louis Dicks-Mireaux, and James Poterba, 1983, “The effective tax rate and the pretax rate of return,” Journal of Public Economics, Vol. 21, No. 2, pp. 129–158.
Foster, Lucia, Cheryl Grim, and John Haltiwanger, 2016, “Reallocation in the Great Recession: Cleansing or Not?” Journal of Labor Economics, Vol. 34, No. S1, pp. S293 – S331.
Gbohoui, William, 2018, “Do Temporary Business Tax Cuts Matter? A General Equilibrium Analysis,” Working Papers forthcoming, International Monetary Fund.
Gourio, François, and Jianjun Miao, 2011, “Transitional Dynamics of Dividend and Capital Gains Tax Cuts,” Review of Economic Dynamics, Vol. 14, No. 2, pp. 368–383.
Heathcote, Jonathan, 2005, “Fiscal Policy with Heterogeneous Agents and Incomplete Markets,” Review of Economic Studies, Vol. 72, No. 1, pp. 161–188.
Henly, Samuel E., and Juan M. Sanchez, 2009, “The U.S. establishment-size distribution: secular changes and sectoral decomposition,” Economic Quarterly, Vol. 95, No. 4, pp. 419–454.
Hopenhayn, Hugo A., 1992, “Exit, selection, and the value of firms,” Journal of Economic Dynamics and Control, Vol. 16, No. 3-4, pp. 621–653.
Hsieh, Chang-Tai, and Peter J. Klenow, 2014, “The Life Cycle of Plants in India and Mexico,” The Quarterly Journal of Economics, Vol. 129, No. 3, pp. 1035–1084.
Jermann, Urban, and Vincenzo Quadrini, 2012, “Macroeconomic Effects of Financial Shocks,” American Economic Review, Vol. 102, No. 1, pp. 238–71.
Khan, Aubhik, and Julia K. Thomas, 2013, “Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity,” Journal of Political Economy, Vol. 121, No. 6, pp. 1055 – 1107.
Lee, Yoonsoo, 2007, “The Importance of Reallocations in Cyclical Productivity and Returns to Scale: Evidence from Plant-Level Data,” Working papers, U.S. Census Bureau, Center for Economic Studies.
Lee, Yoonsoo, and Toshihiko Mukoyama, 2015, “Entry and exit of manufacturing plants over the business cycle,” European Economic Review, Vol. 77, No. C, pp. 20–27.
Ljungqvist, Alexander, and Michael Smolyansky, 2018, “To Cut or Not to Cut? On the Impact of Corporate Taxes on Employment and Income,” NBER Working Papers 20753, National Bureau of Economic Research, Inc.
Mertens, Karel, 2018, “The Near Term Growth Impact of the Tax Cuts and Jobs Act,” Working papers, Federal Reserve Bank of Dallas.
Mertens, Karel, and Morten Ravn, 2013, “The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States,” American Economic Review, Vol. 103, No. 4, pp. 1212–47.
Moreira, Sara, 2017, “Firm Dynamics, Persistent Effects of Entry Conditions, and Business Cycles,” Working papers, U.S. Census Bureau, Center for Economic Studies.
Tauchen, George, 1986, “Finite state markov-chain approximations to univariate and vector autoregressions,” Economics Letters, Vol. 20, No. 2, pp. 177–181.
Appendix A. Stationary Equilibrium
The algorithm used to solve for the stationary equilibrium consists of the following steps.
1. Guess wages and solve for the decision rules incumbents and new entrants.
2. Compute the stationary distribution by simulation.
3. Verify that the labor market clears.
Appendix B. Transition Dynamics
Given the steady-state solution and the policy described in section , we solve for the transitional dynamics as follows.
1. Compute the stationary equilibrium objects: w, r, c, V, Ve, and set the length of the transition T to 10. Increasing further T does not produce any effect.
2. Guess paths for consumption
such that c10 = c and w10 = w.
3. Given the consumption path, derive the path for interest rate,
, and r11 =r.
4. Given wages and interest rates, solve the dynamic problem of incumbents by backward induction assuming that
is the value function during the transition.
5. Given the policy and value functions of incumbents, compute the value and policy functions of new entrants.
6. Simulate a sequence of entry/exit and productivity shocks of length 10, and track the whole distribution of firms over 10 periods.
7. Given the implied sequence of cross-sectional distributions, compute aggregate investment it, output yt and labor demand nt at each period of the transition. Then, derive the implied value of consumption ĉt, using the resource constraint ĉt = yt – it – g.
8. Check whether ĉt ≈ ct and nt ≈ 1.
A previous version of this paper is a chapter in the thesis of William Gbohoui and has been presented at various conferences. For useful comments, we thank Marialuz Moreno Badia, Julien Bengui, Gian Luca Clementi, Shafik Hebous, Li Liu, Catherine Pattillo, Markus Poschke, Mbaye Samba, Abdelhak Senhadji; discussants and seminar attendants at the Fiscal Affairs Department-IMF, Université de Montréal, Western Ontario, World Bank, the 2017 Annual Macroeconomics and Business CYCLE Conference, 2016 LuBraMacro, 2016 Society of Economic Dynamics Conference, and 2016 CEA meetings for useful comments. The usual disclaimer applies.
Other related papers include Jermann and Quadrini (2012), who consider a business cycle model of a representative firm subject to financial frictions, and Bassetto, Cagetti, and De Nardi (2015), who consider a business cycle model of heterogeneous entrepreneurs subject to financial frictions.
Abstracting from access to the bond market is without loss of generality in the present setting, where taxation is lump-sum. This is an instance of the Modigliani-Miller proposition, only the level of external funding matters, not the capital structure. Further, working with equity simplifies the analysis since we don’t need to carry the current debt level as a state variable in the firm’s problem. Gourio and Miao (2011) also consider an all-equity baseline model. Differently from us, in their case firms may raise unlimited amounts of external funding through new equity issuance. Their focus is on the implications of distortionary taxation for payout policies (dividend vs stock repurchases).
In the context of all-equity firms, this formulation is isomorphic to one where dividends are non-negative but firms may either issue new equity or make equity repurchases. Positive dividends in the simplified formulation should therefore be interpreted as net firm payouts (dividends plus net equity repurchases), and negative dividends as instances of new equity issuance.
Notice that, in addition to lump-sum taxation, our assumption of exogenous entry and exit is also important to deliver a Ricardian benchmark. In general, entry and exit decisions won’t be neutral to changes in lump-sum taxes.
Financial constraints are still overall tighter for smaller firms in the model, since these tend to be farther away from their unconstrained optimal size. See the discussion surrounding Figure 2.
We make this assumption to partially deal with the fact that, with lump-sum taxation, small firms pay a proportionally high amount of taxes.
We also assume g is small enough relative to average productivity, so that government spending does not necessarily exhaust aggregate production.
Although we calibrate our model to establishment-level observations, we still refer to production units in our model as firms.
In order to arrive at a 1/3 capital share in our model, we assume that the profits firms generate after incurring investment expenditures and making payments to labor are attributed to capital and labor according to the shares α and 1-α.
The source is the White House Historical Tables. The tax revenue is reported on a domestic basis and therefore includes foreign corporations operating in the U.S.
Notice that the only important role g plays in the analysis is in ensuring a constant target for government revenue in our tax experiments.
In the data, “cash” corresponds to cash and equivalent assets with short maturity (less than 3 months). As the model counterpart of cash, we choose dividends conditional on them being positive, and zero otherwise.
This figure is a bit lower than the 60% figure reported by Lee and Mukoyama (2015) from the U.S. Census Bureau’s Annual Survey of Manufactures (ASM) over the period 1972–1997, but higher than the 10% used by Khan and Thomas (2013)
The unconstrained investment level
In the empirical counterpart, initial employment size is defined as (nt + nt-1)/2, where nt is aggregate employment at time t. In our model, nt = 1 for all t.
To be able to talk about these effects, the tax cut should last more than just one period, so that entrants have a chance to benefit from it (alternatively, the policy could be pre-announced). Also, one could consider that firms receive a signal about their productivity upon the entry decision, in order for the selection margin to be operative (Clementi and Palazzo, 2016).