A Structural Model of Human Capital and Leverage - Duke ...

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Wage Risk Premium/Default Risk Premium 0.25 0.2 0.15 0.1 0.05 Wages and Interest Expense Vs. Debt w(b)*n r(b)*b 0 0 0.1 0.2 0.3 0.4 Debt 0.5 0.6 0.7 0.8 Figure 5: Wages and Interest Expense Vs. Debt The dashed line plots the wage risk premium as a function of debt in the model, while the solid line plots the interest rate risk premium. As debt exposes both employees and bondholders to risk, each must be compensated for bearing that risk. 39
Marginal Cost 2.5 2 1.5 1 0.5 Marginal Cost of Debt Marginal Wage Expense + Marginal Interest Expense Marginal Wage Expense Marginal Interest Expense 0 0 0.1 0.2 0.3 0.4 Debt 0.5 0.6 0.7 0.8 Figure 6: Marginal Cost of Debt The solid line plots the marginal interest expense, the dashed line the marginal wage expense, and the dotted line the total marginal cost associated with debt (the sum of the first two lines), each as a function of debt in the model. In a model which ignores labor, the optimal debt policy would be determined by the solid line, whereas in my model the optimal debt policy is determined by the dotted line. 40
Page 1 and 2: A Structural Model of Human Capital
Page 3 and 4: Additionally, I assume that labor a
Page 5 and 6: ecoming unemployed drops, so it bec
Page 7 and 8: Rampini and Viswanathan (2010) deve
Page 9 and 10: is on the market to book ratio. Mov
Page 11 and 12: Positive dividends are subject to t
Page 13 and 14: 4.1 Labor Market Equilibrium In thi
Page 15 and 16: endogenous default probability, the
Page 17 and 18: is increasing in the probability of
Page 19 and 20: Note that the critical value for de
Page 21 and 22: Substituting in the solution for ω
Page 23 and 24: employees who likely suffer more si
Page 25 and 26: long-run mean, the dotted line fixe
Page 27 and 28: ottom half of the panel shows the l
Page 29 and 30: References Acemoglu, Daron, 2002, T
Page 31 and 32: Jermann, Urban, and Vincenzo Quadri
Page 33 and 34: Table 2: Book Leverage and Labor In
Page 35 and 36: Table 5: Leverage and the Cross-Sec
Page 37 and 38: Mean Market Leverage .15 .2 .25 .3
Page 39: Firm Value 3 2.5 2 1.5 1 0.5 Panel

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