Giuliano Curatola

Direct and Indirect Risk-Taking Incentives of Inside Debt

We develop a model of managerial compensation structure and asset risk choice. The model provides predictions about the relation between credit spreads and different compensation components. First, we show that credit spreads are decreasing in inside debt only if it is unsecured. Second, the relation between credit spreads and equity incentives varies depending on the features of inside debt. We show that credit spreads are increasing in equity incentives. This relation becomes stronger as the seniority of inside debt increases. Using a sample of U.S. public firms with traded credit default swap contracts, we provide evidence supportive of the model’s predictions.

Asset Prices with Heterogeneous Loss Averse Investors

This paper considers a general-equilibrium model with loss-aversion in consumption and heterogeneity: there is a continuum of agents, with s-shaped utility, who differ in the time-varying reference level of consumption. Heterogeneity in the reference level is crucial for the existence of the equilibrium, which cannot be obtained with a representative agent or a discrete number of agents. Loss-aversion in consumption induces a kink in the pricing kernel and consequently, jumps in the market price of risk, stock return, and volatility. An economy populated with only loss-averse agents produces one counter-factual property of asset price: the return volatility and the market price of risk are higher in good times than in bad times. The coexistence of both loss-averse and risk-averse agents in the economy helps fixing this undesirable property and also explains the dynamics of trading volume and its correlation with asset prices.

Investment-Specific Shocks, Business Cycles, and Asset Prices

We introduce long-run investment productivity risk in a two-sector production economy to explain the joint behavior of macroeconomic quantities and asset prices. Long-run productivity risk in both sectors, for which we provide economic and empirical justification, acts as a substitute for shocks to the marginal efficiency of investments in explaining the equity premium and the stock return volatility differential between the consumption and the investment sector. Moreover, adding moderate wage rigidities allows the model to reproduce the empirically observed positive co-movement between consumption and investment growth.

Austerity, Fiscal Uncertainty, and Economic Growth: Insights from Fiscally Weak EU Countries

This paper contributes to the ongoing debate on the relationship between austerity measures and economic growth. We propose a general equilibrium model where (i) agents have recursive preferences; (ii ) economic growth is endogenously driven by investments in RD (iii) the government is committed to a zero-deficit policy and finances public expenditures by means of a combination of labor taxes and R&D taxes. We find that austerity measures that rely on reducing resources available to the R&D sector depress economic growth both in the short- and long-run. High debt EU members are currently implementing austerity measures based on higher taxes and/or lower investments in the R&D sector. This casts some doubts on the real ability of these countries to grow over the next years.Recent empirical evidence suggests that during the last years fiscally weak European countries significantly cut their R&D budgets in an effort to reduce their deficit, according to the spirit of the Fiscal Compact. We propose a general equilibrium model that endogenously captures the trade-off between costs and benefits of austerity measures driven by a zero-deficit policy. Our analysis suggests that cuts in R&D spending undermine economic growth both in the short and the long run. We use our model to estimate the reduction of economic growth due to R&D cuts implemented by fiscally weak European countries during the period 2010-2012. The model predicts a reduction in real growth by 0:63%, 2:93%, and 4:46%, in the next 1, 5, and 10 years, respectively. Moreover, we show that the zero-deficit constraint hampers economic growth in the presence of either a productivity drop or a spending stimulus.

Consumption Risk, Preference Heterogeneity and Asset Prices

This paper proposes a pure-exchange economy with three key ingredients: habit formation, stochastic moments of aggregate consumption, and a small degree of heterogeneity in risk aversion consistent with empirical data. We obtain closed formulas for many equilibrium quantities, including the moments of stock returns and individual portfolios. The proposed framework explains simultaneously the main features of stock returns – like cyclicality, persistence and predictability – as well as the counter-cyclical dynamics of the trading volume and its correlation with stock returns. In addition, we provide new testable implications concerning the dynamic behavior of the cross-sectional consumption/portfolio distribution over the business cycle.