Thomas Winberry

Thomas Winberry
Assistant Professor of Finance, The Wharton School


Working Papers

Capital, Ideas, and the Costs of Financial Frictions, with Pablo Ottonello
We study the role of financial frictions in determining the allocation of investment and innovation. Empirically, we find that firms are investment-intensive when they have low net worth but become innovation-intensive as they accumulate more net worth. To interpret these findings, we develop an endogenous growth model with heterogeneous firms and financial frictions. In our model, low net worth firms are investment-intensive because their returns to capital are high. Financial frictions slow the rate at which firms exhaust the returns to capital and shift towards innovation. Calibrating to the US economy, we find that the resulting lower growth implies large GDP losses even though capital misallocation is small. In other words, financial markets effectively fund the implementation of existing ideas, but do not adequately fund the discovery of new ideas. If innovation has positive spillovers, a planner would not only raise innovation but also lower investment expenditures among constrained firms.

The Macroeconomic Dynamics of Labor Market Policies, with Erik Hurst, Patrick Kehoe, and Elena Pastorino, revise and resubmit at the Journal of Political Economy
We develop a dynamic macroeconomic framework with worker heterogeneity, monopsony power, and putty-clay adjustment frictions in order to study the distributional impact of labor market policies in the short and long run. Our model helps reconcile the tension between low short-run and high long-run elasticities of substitution across inputs of production. We use the model to assess the labor market effects of redistributive policies such as the federal minimum wage and the Earned Income Tax Credit (EITC). A key result of our analysis is that measuring the welfare impact of these policies requires taking into account the entire time path of the responses they induce. For instance, either increasing the minimum wage or expanding the EITC makes low-wage workers better off in the short run. However, the effects of the two policies can differ in the long run. At longer horizons, both small minimum wage increases and EITC expansions of any size continue to make low-wage workers better off, whereas sufficiently large minimum wage increases adversely impact these workers. We find that combining either the EITC or the overall tax and transfer system with moderate increases in the minimum wage better supports the income and welfare of low-wage workers than either policy in isolation, because doing so more effectively offsets firms' monopsony power. We conclude by discussing the conditions under which empirical estimates of the short-run effects of labor market policies are informative about their ultimate long-run effects through the lens of our model.


The Investment Network, Sectoral Comovement, and the Changing U.S. Business Cycle, with Christian vom Lehn (Quarterly Journal of Economics, Volume 137, Issue 1 (February 2022) 387-433) Investment Network Data
We argue that the network of investment production and purchases across sectors is an important propagation mechanism for understanding business cycles. Empirically, we show that the majority of investment goods are produced by a few ``investment hubs" which are more cyclical than other sectors. We embed this network into a multisector business cycle model and show that sector-specific shocks to the investment hubs and their key suppliers have large effects on aggregate employment and drive down labor productivity. Quantitatively, we find that sector-specific shocks to hubs and their suppliers account for an increasing share of aggregate fluctuations over time, generating the declining cyclicality of labor productivity and other changes in business cycle patterns since the 1980s.

Lumpy Investment, Business Cycles, and Stimulus Policy
(American Economic Review, Vol. 111, Issue 1 (January 2021) 365-396) Appendices
I study the aggregate implications of micro-level lumpy investment in a model consistent with the empirical dynamics of the real interest rate. I find that the elasticity of aggregate investment with respect to shocks is procyclical because more firms are likely to make an extensive margin investment in expansions. Matching the dynamics of the real interest rate is key to generating this result; otherwise, counterfactual behavior of the model would eliminate most of the procyclical responsiveness in general equilibrium. Therefore, data on interest rates places important discipline on the role of general equilibrium in aggregating micro-level investment.

Financial Heterogeneity and the Investment Channel of Monetary Policy, with Pablo Ottonello (Econometrica, Vol. 88, No. 6 (November 2020), 2473-2502) Submitted version (with appendices)
We study the role of financial frictions and firm heterogeneity in determining the investment channel of monetary policy. Empirically, we find that firms with low default risk -- those with low debt burdens and high ``distance to default" -- are the most responsive to monetary shocks. We interpret these findings using a heterogeneous firm New Keynesian model with default risk. In our model, low-risk firms are more responsive to monetary shocks because they face a flatter marginal cost curve for financing investment. The aggregate effect of monetary policy may therefore depend on the distribution of default risk, which varies over time.

A Method for Solving and Estimating Heterogeneous Agent Macro Models
(Quantitative Economics , Vol. 9, Issue 3 (November 2018) 1123 - 1151)
Dynare codes and user guide for Krusell-Smith and Codes for Khan-Thomas
I develop a computational method for solving and estimating heterogeneous agent macro models with aggregate shocks. The main challenge is that the aggregate state vector contains the distribution of agents, which is typically infinite-dimensional. I approximate the distribution with a flexible parametric family, reducing its dimensionality to a finite set of endogenous parameters, and solve for the dynamics of these endogenous parameters by perturbation. I implement the method in Dynare and show that it is fast, general, and easy to use. As an illustration, I use the method to perform a Bayesian estimation of a heterogeneous firm model with aggregate shocks to neutral and investment-specific productivity. I find that the behavior of investment at the firm level quantitatively shapes inference about the aggregate shock processes, suggesting an important role for micro data in estimating DSGE models.

When Inequality Matters for Macro and Macro Matters for Inequality, with SeHyoun Ahn, Greg Kaplan, Ben Moll, and Christian Wolf (NBER Macroeconomics Annual, Vol. 32, Issue 1 (January 2018) 1-75)
Matlab Toolbox available on github here
We develop an efficient and easy-to-use computational method for solving a wide class of general equilibrium heterogeneous agent models with aggregate shocks. Our method extends standard linearization techniques and is designed to work in cases when inequality matters for the dynamics of macroeconomic aggregates. We present two applications that analyze a two-asset incomplete markets model parameterized to match the distribution of income, wealth, and marginal propensities to consume. First, we show that our model is consistent with two key features of aggregate consumption dynamics that are difficult to match with representative agent models: (i) the sensitivity of aggregate consumption to predictable changes in aggregate income and (ii) the relative smoothness of aggregate consumption. Second, we extend the model to feature capital-skill complementarity and show how factor-specific productivity shocks shape dynamics of income and consumption inequality.

Work In Progress

Misallocation Over the Business Cycle with Pablo Ottonello (National Science Foundation grant, co-PI with Pablo Ottonello)

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