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Research#

Working Papers#

  • "Not-So-Cleansing Recessions," with Frederik Bennhoff and Alessandro Ferrari, 2025.
    ArXiv DraftSlides
    Summary
    Main Figure of Bajo et al. (2025)

    Recessions are periods in which the least productive firms in the economy exit, and as the economy recovers, they are replaced by new and more productive entrants. These cleansing effects improve the average firm productivity. At the same time, recessions induce a loss of varieties. We show that the long-run welfare effects trade off these two forces. This trade-off is governed by love-of-variety and the elasticity of substitution in aggregate production. If industry output is aggregated with the standard CES aggregator, recessions do not bring about any improvement in GDP and welfare. If the economy features more love-of-variety than CES, the social planner optimally subsidizes economic activity both in steady state and even more so in recessions to avoid firm exit. We use the model and quasi-exogenous variation in demand to estimate love-of-variety. We find it to be significantly higher than implied by CES aggregation, suggesting that even the long-run effects of recessions are negative. Finally, we quantitatively characterize the optimal policy response both along the transition and in the steady state.

    Presented at: SED Annual Meeting; 4th workshop on Firm Heterogeneity & Macroeconomics; Schumpeter@100: Firm Dynamics, Growth, and Heterogeneity; Esade Macro Meetings (EM2); University of Oxford; UCL; Queen Mary University of London; University of Bristol; Nova SBE; Barcelona School of Economics; University of Zurich; SFI PhD Workshop.

  • "Local stock markets," with Charles Parry, 2025.
    Draft
    Summary
    Main Figure of Bajo et al. (2025)

    Europe’s public equity markets have underperformed, new listings have declined, and an increasing number of firms are seeking listings in the United States. These developments have spurred debate on how to sustain local exchanges. We develop a theory of local stock markets to rationalize these trends and assess motives for policy intervention. In a two-country setting, firms choose entry and listing venues, and investors choose portfolios based on private signals whose precision depends on investor location and the firm’s listing decision. These choices jointly determine the information environment and asset prices in a noisy rational-expectations equilibrium. Our main result establishes that local stock markets rely on a sufficiently large effective investor base – the risk-adjusted size of local informed capital – and that a contraction in the effective investor base can trigger increased foreign listings and falling domestic activity. In addition, our model provides a theory of joint home bias, capturing the tendency of international listing decisions to reflect investor home bias.

    Presented at: Wharton Finance PhD Brown Bag; University of Zurich; SFI PhD Workshop.

Work in Progress#

  • "When horizons converge: investor selection, firm output, and aggregate welfare," with Fulvia Oldrini.