Labor Leverage, Coordination Failures, and Aggregate Risk

88 Pages Posted: 4 Jun 2018 Last revised: 19 Nov 2020

See all articles by Matthieu Bouvard

Matthieu Bouvard

University of Toulouse 1 - Toulouse School of Economics (TSE); Toulouse School of Management

Adolfo de Motta

McGill University - Desautels Faculty of Management

Date Written: November 1, 2020

Abstract

This paper studies an economy where demand spillovers make firms' production
decisions strategic complements. Firms choose their operating leverage
trading off higher fixed costs for lower variable costs. Operating leverage
governs firms' exposures to an aggregate labor productivity shock. In
equilibrium, firms exhibit excessive operating leverage as they do not
internalize that an economy with higher aggregate operating leverage is more
likely to fall into a recession following a negative productivity shock.
Welfare losses coming from firms' failure to coordinate production are
amplified by suboptimal risk-taking, which magnifies the impact of
productivity shocks onto aggregate output.

Keywords: coordination failure, operating leverage, systematic risk

JEL Classification: D80, D61, D62

Suggested Citation

Bouvard, Matthieu and de Motta, Adolfo, Labor Leverage, Coordination Failures, and Aggregate Risk (November 1, 2020). Paris December 2018 Finance Meeting EUROFIDAI - AFFI, Available at SSRN: https://ssrn.com/abstract=3189575 or http://dx.doi.org/10.2139/ssrn.3189575

Matthieu Bouvard (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Toulouse School of Management ( email )

2, rue du Doyen Gabriel Marty
Toulouse, 31042
France

Adolfo De Motta

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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