Boyan Jovanovic

An Estimated Model of Entrepreneurial Choice under Liquidity Constraints

Is the capital function distinct from the entrepreneurial function in modern economies? Or does a person have to be wealthy before he or she can start a business? Knight and Schumpeter held different views on the answer to this question. Our empirical findings side with Knight: Liquidity constraints bind, and a would-be entrepreneur must bear most of the risk inherent in his venture. The reasoning is roughly this: The data show that wealthier people are more inclined to become entrepreneurs. In principle, this could be so because the wealthy tend to make better entrepreneurs, but the data reject this explanation. Instead, the data point to liquidity constraints: capital is essential for starting a business, and liquidity constraints tend to exclude those with insufficient funds at their disposal.

Stock markets and development

This paper asks if financial development (especially stock-market development) affects the level and/or the growth rate of economic activity. It finds a substantial effect on both. Current wisdom suggests that the growth effects of financial intermediation could be either permanent or transitory. For instance, the Greenwood-Jovanovic (1990) (henceforth GJ) model has an ‘AK’ stucture, with no diminishing returns to the reproducible factor, and a permanent, exogenous improvement in financial structure would cause a permanent increase in the rate of growth. ’ On the other hand, if the returns to the reproducible factor did diminish, better intermediation could lead only to level effects. Since one should not a priori exclude either growth effects or level effects, we shall look for both. Our search for growth effects will use the GJ model; our search for level effects will rely on an amended version of the Mankiw, Romer and Weil ( 1992) (henceforth MRW) structure.

Firm-specific Capital and Turnover

This is a model of permanent job separations when there are endogenous firm-specific human capital and intensity of on-the-job search. The result is a combination of human-capital theory with the theory of search turnover and search unemployment. An interesting technical twist is that the workers decision problem under uncertainty is solved by means of the deterministic maximum principle.

Learning by Doing and the Choice of Technology

This paper explores a one-agent Bayesian model of learning by doing and technological choice. To produce output, the agent can choose among various technologies. The beneficial effects of learning by doing are bounded on each technology, and so long-run growth in output can take place only if the agent repeatedly switches to better technologies. As the agent repeatedly uses a technology, he learns about its unknown parameters, and this accumulated expertise is a form of human capital. But when the agent switches technologies, part of this human capital is lost. It is this loss of human capital that may prevent the agent from moving up the quality ladder of technologies as quickly as he can, since the loss is greater the bigger is the technological leap. We analyze the global dynamics. We find that a human-capital- rich agent may find it optimal to avoid any switching of technologies, and therefore to experience no long-run growth. On the other hand, a human-capital-poor agent, who because of his lack of skill is not so attached to any particular technology, can find it optimal to switch technologies repeatedly, and therefore enjoy long-run growth in output. Thus the model can give rise to overtaking.

The Growth and Diffusion of Knowledge

This paper analyzes a decentralized process for the diffusion of knowledge. In equilibrium, the economy converges from an initial distribution of knowledge over agents to the steady-state distribution, which is unique. Because of the public good aspect of information, too little learning takes place, and ideas are implemented too early. The key difference between earlier formulations of search externalities by Diamond, Mortensen, and Spence on the one hand, and our own on the other, is that here spillovers of knowledge depend not only on how hard people are trying, but also on the differences in what they know: if all of us know the same thing, we cannot learn from each other. The model also addresses the following two substantive questions: first, the relationship between inequality and growth, noted some time ago by Kuznets, and second, the effect on growth of improvements in the communication technology.

Matching, Turnover, and Unemployment

This paper develops the view that workers move into and out of the labor market because of changes in the perceived value of their market opportunities. A search model is combined with a matching model to yield movement of workers from job to job and into and out of employment.

Middlemen in Limit Order Markets

We model high-frequency traders in electronic markets. We ask how the presence of such middlemen may affect welfare. We find that middlemen process public information faster than the average investor. As such, they can play a positive or a negative role. On the positive side, when they enter a market they can raise welfare by solving a pre-existing adverse selection problem. In that case their entry is accompanied by a rise in trade and a fall in bid-ask spreads, and they can raise welfare by up to 30% of the gap between its equilibrium level and its first-best level. On the negative side, they can create or exacerbate an adverse- selection problem, in which case spreads rise and trade declines. Our evidence on this score is mixed. On the one hand, middlemen’s participation lowers spreads but, on the other, it also lowers trade.

An Estimate of a Sectoral Model of Labor Mobility

This paper develops a model of sectoral labor mobility and tests its main implications. The model nests two distinct hypotheses on the origin of mobility: (a) sectoral shocks and (b) worker-employer mismatch. We estimate the relative importance of each hypothesis and find that the bulk of labor mobility is caused by mismatch rather than by sectoral shift. We then try to put a value on societys match-specific information. That is, we ask to what extent the availability of the option to change jobs raises GNP. We find that the mobility option raises expected earnings by roughly between 8.5 percent and 13 percent of labor earnings, which translates to an increase in GNP of between 6 percent and 9 percent.

Knowledge Spillovers and Inequality

We develop a dynamic model with knowledge spillovers in production. The model contains two opposing forces. Imitation of other firms helps followers catch up with leaders, but the prospect of doing so makes followers want to free ride. The second force dominates and creates permanent inequality. We show that the greater are the average spillovers and the easier they are to obtain, the greater is the free-riding and inequality. More directed copying raises inequality by raising the free-riding advantages of hanging back. Using Compustat and patent-citation data we find that copying is highly undirected.

Bidder Discounts and Target Premia in Takeovers

When a takeover is announced, the sum of the stock-market values of the firms involved often falls, and the value of the acquirer almost always does. Does this mean that takeovers do not raise the values of the firms involved? Not necessarily. We set up a model in which the equilibrium number of takeovers is constrained efficient. Yet, upon news of a takeover, a targets price rises, the bidders price falls, and, most of the time the joint value of the target and acquirer also falls.