July 2023

Aggregate Implications of Deviations from Modigliani-Miller: A Sufficient Statistics Approach

Robert Kurtzman and David Zeke


A few sufficient statistics can identify the aggregate effects of distortions to firm investment in a class of general equilibrium models that can accommodate rich general equilibrium effects including endogenous firm entry. This result does not depend on the microfoundation of the distortion; one can generate inferences about aggregate effects that apply for multiple microfoundations or in cases where a fully specified model is difficult to solve. To demonstrate the relevance of the methodology, we use it to quantify the aggregate consequences of costly external equity financing and a manager-shareholder friction, relying on estimates from the corporate finance literature to identify the sufficient statistics. The results elucidate differences between partial and general equilibrium findings and demonstrate how labor supply elasticities, complementarities in production, and firm entry interact with the different firm-level distortions.

Keywords: Agency Costs, Costly External Finance, Firm Entry, General Equilibrium, Heterogeneous Firms, Sufficient Statistics

DOI: https://doi.org/10.17016/FEDS.2023.045

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