Topics on firm heterogeneity and economic policy
This thesis presents a series of works exploring individual firm behavior and how that affects the macroeconomics data. Chapter one explores the trends in competition, markups and market shares in a general equilibrium model. Over the last 30 years markups, as well as advertising expenses, have increased substantially. Moreover, there is a positive correlation between marketing expenditures and markups, a feature that standard models of monopolistic competition based on Dixit-Stiglitz have found it difficult to obtain. The model here adds endogenous market expansion choice (through product marketing) for firms to an otherwise standard monopolistic competition model. The marketing is modeled as a contest in which heterogeneous firms can shift the demand of the variety they produce, but also suffer from other firms engaging in the same activity. In the model's equilibrium, product marketing and pricing decisions interact with each other, altering markups proportional to the level of marketing expenditures by individual firms. This is another result that many empirical studies find. The model also creates a link between total factor productivity and markups through investments in product marketing. The model shows that markups and market concentration depends on the variance of total factor productivity. It also illustrates how the elasticity of substitution in an industry can affect the markup distribution. The second chapter is based on the work co-authored with Dr. Mattias Polborn, where we analyze a theoretical model in which entrepreneurs' property rights are threatened by ``raiders'' who can challenge them to a contest for control of their firms. Entrepreneurs have heterogeneous productivity and decide how much capital to invest before raiders decide whom to attack. In equilibrium, low productivity entrepreneurs are unaffected by the existence of raiders, while mid- and high-productivity entrepreneurs suffer. However, while raiders essentially act as a tax for the highest productivity entrepreneurs, the investment behavior of mid-productivity entrepreneurs who try to avoid an attack is more drastically affected. Our model provides a novel theoretical explanation for the ``missing middle'' observed in many countries with insecure property rights. The third chapter analyses the effects of monetary policy on firm's investment decision by adding technology investments into otherwise standard New Keynesian models. In standard New Keynesian models growth rate of the economy is assumed to be exogenous and out of the scopes of monetary authority's control. The framework developed here adds stochastic growth rates determined from firm-specific investments. Firms carry costs from price adjustments and can accumulate technology by technological investments, which aggregates as a level of technology in the economy. Under this setup inflation and monetary shocks have a considerably large impact on the growth rates of the economy. Interest rate change counteracting cycle interferes with growth and the variable levels. Policy rules that penalize for inflation more perform more favorably under this setup.
macroeconomics, firm distribution, marketing expenditures, advertising, heterogeneous firms, contests, economics, monetary policy
University of Illinois - Urbana-Champaign
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University of Illinois at Urbana-Champaign