Daniel Wills
Interests: Macroeconomics, Public Finance, Financial Economics

Job Market Paper

Taxing Firms Facing Financial Frictions

(with Gustavo Camilo)
In the U.S., corporate income is taxed several times at different sources. Profits are taxed at the firm level, dividends and capital gains are taxed at the individual level, and interest payments on debt are taxed at the personal income rate. We investigate how the different rates above affect firm investment and the allocation of capital in the economy. To do so, we construct and calibrate a model with heterogeneous firms, borrowing constraints, costly equity issuance and endogenous entry and exit. Because of the financial frictions, the taxes mentioned are not perfect substitutes and distort different margins. In our model firms enter small and grow over time to reach an optimal size. The corporate income tax decreases earnings and net worth. Moreover, the amount of leverage optimally chosen by firms during the growth process is proportional to their net worth. As a result, small firms grow more slowly as capital accumulation is delayed. Taxes on dividends, capital gains and interest income do not reduce net worth. We use the model to quantitatively analyze the steady state consequences of a reform that replaces the corporate income tax by a common tax on shareholders. We find that such reform improves the allocation of capital in the economy, increasing total factor productivity by 1.7%.


Fighting for the Best, Losing with the Rest: On the Desirability of Competition in Financial Markets

(with Juan Hernandez)
We study the credit market for firms that lack collateral and have a large uncertainty about their ability to generate any profit -such as business start-ups- by characterizing optimal financial contracts in a competitive environment with risk, adverse selection and limited liability. We find that competition among financial intermediaries always forces them to fund projects with negative expected returns both from a private and from a social perspective, providing a justification for regulating financial intermediaries. The three ingredients: competition, adverse selection and limited liability are necessary to get the inefficient outcome. Allowing for some collateral reduces but does not completely eliminate the inefficiency.

Optimal Capital Taxes and Entrepreneurial Choice (in progress)

(with Ali Shourideh and Juan Hernandez)
We characterize optimal business and labor income tax schedules in an environment in which agents can choose to be entrepreneurs or workers. Agents privately observe their skill for each occupation and also privately decide the corresponding investment and effort intensities. The different nature of the incentive structure in each sector results in a distortion of the occupational choice margin, and the resulting sector specific tax schedules are different than they would be in a world without sector mobility. In the case where workers supply hours inelastically, a Rawlsian planner sets the marginal tax on labor income always higher than the marginal tax on operating profits; in particular consumption is not equalized among workers.

Labor Market Rigidities and Informality in Colombia (pre-PhD)

(with Camilo Modragón-Vélez and Ximena Peña)
Informality is at the center of the economic debate in Colombia, fueled by the high level
prevalent in the country and its substantial increase during the 1990s. We study the
effect of labor market rigidities, namely the increase in non-wage costs and the
minimum wage on the size of the informal sector, the transition into and out of
informality, and wages. Our results indicate that rises in non-wage costs and the
minimum wage, increase the probability of transition into informality as well as the size
of the informal sector. The analysis of these effects along the income distribution points
towards strong exclusion motives for low skilled informal workers, mainly driven by
labor demand adjustments in response to increasing hiring costs; and argues somehow
in favor of exit motives for workers at the top of the wage distribution. Furthermore,
there is strong indexation of salaries to the minimum wage, except for low skilled
informal workers. In addition, firms adjust salaries in response to increasing non-wage
costs for all workers within the labor force.


Referee for the International Economic Review, the ILR Review and Desarrollo y Sociedad.


Prof. Harold Cole
Department of Economics,
University of Pennsylvania
(215) 898-7788

Prof. Dirk Krueger
Department of Economics,
University of Pennsylvania
(215) 573-1424

Prof. Ali Shourideh
Tepper School of Business,
Carnegie Mellon University
(612) 501-9467

Prof. Joao Gomes
Finance Department (Wharton),
University of Pennsylvania
(215) 898-3666


I am on the job market and will be available for interviews at the ASSA/AEA meetings in Chicago from January 5th to January 9h.