Essays on spillovers, institutions, labor and credit

Fazio, Dimas Mateus (2020) Essays on spillovers, institutions, labor and credit. Doctoral thesis, University of London: London Business School.

Abstract

This thesis examines how economic shocks and policies spillover in the economy. In the first chapter, I examine how banks reallocate credit across borrowers as a result of stronger creditor rights. In 2004, the Brazilian government introduced a new collateral contract for home-equity loans, with much quicker repossession by creditors in case of default. I find an increase in credit availability in areas with higher homeownership at the expense of lower credit supply in areas with lower homeownership as a result of this law. In addition to credit being reallocated, there are relevant heterogeneous real economic effects in these regions, and ultimately workers migrate from low to high homeownership. In the second chapter, I analyze whether institutional quality explains the propagation of shocks in the supply chain. I use natural disasters as initial shocks and then see what happens to firms that had a supplier directly affected by the disaster against firms that are not connected to the shock. I find that connected firms experience a significant drop in cash inflow, cash outflow, and employment relative to unconnected firms in the same local industry. The propagation is particularly severe for connected firms located in areas with congested courts. Connected firms outsource credit risk through factoring and firms with unused credit lines suffer less. The third chapter documents that a more generous unemployment insurance (UI) system shifts labor supply from safer to riskier firms and reduces compensating wage differentials risky firms need to pay. Consequently, a more generous UI system increases risky firms' value and fosters entrepreneurship by reducing new firms' labor costs. Exploiting a UI reform in Brazil that affects only part of the workforce, the empirical strategy compares labor supply for workers with different degrees of UI protection within the same firm, sharpening identification of the results. Altogether, the results suggest that UI provides a transfer system from safe to risky firms. Overall, my thesis provides evidence that indirect effects of shocks and economic policies can be relevant in the economy.