This paper provides evidence that investment-specific technological change is a source of systematic risk. In contrast to neutral productivity shocks, the economy needs to invest to realize the benefits of innovations in investment technology. A positive shock to investment technology is followed by a reallocation of resources from consumption to investment, leading to a negative price of risk. A portfolio of stocks that produce investment goods minus stocks that produce consumption goods (IMC) proxies for the shock and is a priced risk factor. The value of assets in place minus growth opportunities falls after positive shocks to investment technology, which suggests an explanation for the value puzzle. I formalize these insights in a dynamic general equilibrium model with two sectors of production. The model’s implications are supported by the data. The IMC portfolio earns a negative premium, predicts investment and consumption in a manner consistent with the theory, and helps price the value cross section. 1

The editor in charge of this paper was Fabrizio Zilibotti. Acknowledgments: Both authors are affiliated with CEPR. We are grateful to the editor and three anonymous referees for useful suggestions. We have benefited from the comments of Francesco

The share of intermediate goods in gross output has declined in the U.S. over the 1958-2004 period. I present a model of gross output production in which the intermediate goods share (IGS) in gross output appears as an explicit part of total factor productivity (TFP) in the value added production function. In particular, a larger IGS implies a smaller TFP level. Therefore, the decline in the IGS can contribute to the observed TFP growth in the U.S. during the period considered. A simple growth accounting exercise shows that when the production function for gross output is Cobb-Douglas in capital, labor and intermediate goods, the IGS accounts for at least 1/4 of TFP growth. With a CES gross output production function, the IGS accounts for up to 61 % of TFP growth. Using this accounting procedure, I also find that intermediate goods are responsible for the most part of the productivity slowdown occurred during the seventies.

Financial market imperfections can prevent entrepreneurs from diversifying away the idiosyncratic risk of their business. As a result idiosyncratic risk discourages entre-preneurial activity and hinders growth, with the effects being stronger in economies with lower risk diversification opportunities. In accordance with this prediction we find that OECD countries with low levels of risk diversification opportunities (as measured by the relevance of family firms or of widely held companies) perform relatively worse (in terms of productivity, investment, and business creation) in sectors characterized by high idiosyncratic volatility. Given that volatility is endogenous with respect to risk diversification opportunities, we instrument its value at the country-sector level with the corresponding sectoral volatility in the US, a country where financial imper-fections are less relevant than elsewhere. Diversification measures are instrumented using demographic changes induced by World War II. We also provide firm-level evi-dence suggesting that firms controlled by less diversified owners display lower mean and dispersion of productivity growth. JEL classification: 04, F3, G1.

Abstract We propose a theory of endogenous firm-level risk over the business cycle based on endogenous market exposure. Firms that reach a larger number of markets diversify market-specific demand shocks at a cost. The model is driven only by total factor productivity shocks and captures the observed countercyclity of firm-level risk. Using a panel of U.S. firms (Compustat) matched to Compustat's Segment data and the U.S. Census Bureau's Longitudinal Business Database (LBD) we show that, consistent with our model, measures of market reach are procyclical, and the countercyclicality of firmlevel risk is driven mostly by those firms that adjust the number of markets to which they are exposed which on average are larger than those that do not. This finding is explained by the negative elasticity between various measures of market exposure and firm-level idiosyncratic risk we uncover. Keyword: Endogenous idiosyncratic risk JEL Classifications: D21, D22, E32, L11, L25 * Previously circulated as "Intangibles and Endogenous Firm Volatility over the Business Cycle." We thank Nick Bloom, Rui

We argue that US welfare would rise if unemployment insurance were to be increased for young workers and decreased for old. This is because young workers have little means to smooth consumption during unemployment, and want jobs to accumulate high-return human capital. So unemployment insurance is highly valuable to them while the induced moral hazard problem is mild. We consider a life cycle model with unemployment risk and endogenous search effort, that we calibrate to match US labor market institutions. We find that allowing unemployment replacement rates and other government transfers to decline with age yields sizeable welfare gains which amount to around two thirds of the gains attained under the constrained optimal scheme for unemployment insurance over the life cycle.

Wealth has fluctuated substantially in recent US macroeconomic history. Figure 1 documents this by plotting the evolution of real net worth of US households and non-profit organizations between 1950 and 2010. 1 Up until the early 1990s the evolution of wealth seems relatively stable, displaying only mild and short-lived fluctuations around its trend. Since then, however, this behavior changed dramatically. From 1995 to 1999, and again from 2002 to 2006, wealth grew at a staggering 9 % per year only to contract violently in subsequent years.

NOTE: Staff working papers in the Finance and Economics Discussion Series (FEDS) are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. References in publications to the Finance and Economics Discussion Series (other than acknowledgement) should be cleared with the author(s) to protect the tentative character of these papers.

parameter based on the approximate MSE. A Monte Carlo study and two empirical applications illustrate the relevance of our estimators.

www.elsevier.com/locate/red Quantifying the impact of financial development on economic