Gian Luca Clementi

Asset Pricing in a Production Economy with Chew-Dekel Preferences

In this paper we provide a thorough characterization of the asset returns implied by a simple general equilibrium production economy with Chew–Dekel risk preferences and convex capital adjustment costs. When households display levels of disappointment aversion consistent with the experimental evidence, a version of the model parameterized to match the volatility of output and consumption growth generates unconditional expected asset returns and price of risk in line with the historical data. For the model with Epstein–Zin preferences to generate similar statistics, the relative risk aversion coefficient needs to be about 55, two orders of magnitude higher than the available estimates. We argue that this is not surprising, given the limited risk imposed on agents by a reasonably calibrated stochastic growth model.

Executive Compensation: Facts

In this paper we describe the important features of executive compensation in the US from 1993 to 2006. Some confirm what has been found for earlier periods and some are novel. Notable facts are that: the compensation distribution is highly skewed; each year, a sizeable fraction of chief executives lose money; the use of security grants has increased over time; the income accruing to CEOs from the sale of stock increased; regardless of the measure we adopt, compensation responds strongly to innovations in shareholder wealth; measured as dollar changes in compensation, incentives have strengthened over time, measured as percentage changes in wealth, they have not changed in any appreciable way.

Entry, Exit, Firm Dynamics, and Aggregate Fluctuations

Do firm entry and exit play a major role in shaping aggregate dynamics? Our answer is yes. Entry and exit propagate the effects of aggregate shocks. In turn, this results in greater persistence and unconditional variation of aggregate time-series. These are features of the equilibrium allocation in Hopenhayn (1992)s model of equilibrium industry dynamics, amended to allow for investment in physical capital and aggregate fluctuations. In the aftermath of a positive productivity shock, the number of entrants increases. The new firms are smaller and less productive than the incumbents, as in the data. As the common productivity component reverts to its unconditional mean, the new entrants that survive become more productive over time, keeping aggregate efficiency higher than in a scenario without entry or exit.

Cross Sectoral Variation in the Volatility of Plant Level Idiosyncratic Shocks

We estimate the volatility of plant–level idiosyncratic shocks in U.S. manufacturing. We measure the variation in Revenue Total Factor Productivity not explained by either industry or economy–wide factors, or by establishments’ characteristics. We find that idiosyncratic shocks are much larger than aggregate shocks, accounting for about 80% of the overall uncertainty faced by plants. Plants in the most volatile sector are subject to about six times as much idiosyncratic uncertainty as plants in the least volatile. We provide evidence suggesting that idiosyncratic risk is higher in industries where the extent of creative destruction is likely to be greater.

Cross-Sectoral Variation in Firm-Level Idiosyncratic Risk

In this paper we use data from the U.S. Census Bureau’s Longitudinal Research Database in order to assess the extent of the cross-sectoral variation in firm-level idiosyncratic risk and shed light on its determinants. We find that firms producing investment goods exhibit greater volatility in sales and TFP growth than firms producing consumption goods. Our data suggests that this may be the case because winner–takes–all competition is more common for the former than for the latter.

Cross-Sectoral Variation in The Volatility of Plant-Level Idiosyncratic Shocks

We estimate the volatility of plant–level idiosyncratic shocks in U.S. manufacturing. We measure the variation in Revenue Total Factor Productivity not explained by either industry or economy–wide factors, or by establishments’ characteristics. We find that idiosyncratic shocks are much larger than aggregate shocks, accounting for about 80% of the overall uncertainty faced by plants. Plants in the most volatile sector are subject to about six times as much idiosyncratic uncertainty as plants in the least volatile. We provide evidence suggesting that idiosyncratic risk is higher in industries where the extent of creative destruction is likely to be greater.