In the first essay I develop a quantitative framework of firm dynamics where the size of the informal sector is determined by financial constraints and government taxation. Informal sector firms do not pay taxes but have no access to external finance. For taxes and financial constraints parameterized for a country like Egypt, I find losses in total factor productivity of over 28% and in output per worker of 60% relative to the US benchmark. The effects of the elimination of formal sector registration costs are small. Improving the access to credit for formal sector firms increases wages, aggregate TFP and output per worker while reducing the size of the informal sector.In my second essay I study the consequences of low financial development in an environment where firms can invest to increase productivity. Lower financial development increases the dispersion of the marginal productivity of capital across firms lowering aggregate production efficiency. However, models of firm dynamics with financial constraints generate modest losses due to misallocation relative to those found in the empirical literature. I construct a quantitative model of firm dynamics with endogenous accumulation of firm productivity where financial constraints diminish the incentives of firms to invest in productivity, reducing firm productivity growth. This channel amplifies the losses from misallocation. The model can partially account for the lower life-cycle productivity growth of firms in economies with underdeveloped financial markets. In the last essay of this thesis, Naoki Takayama and I study the consequences of recessions for young individuals and the impact of government taxation. Recessions generate increases in youth unemployment and significant losses in the expected value of labor earnings. We build a life cycle model with on-the-job human capital accumulation, aggregate and idiosyncratic productivity shocks and heterogeneous workers. We find that in countries where the tax-wedge is higher, unemployment rates are amplified. We compute the long-term earnings losses of individuals that lose their job in different states of the economy and find that losses are bigger: in worse aggregate states of the economy, for younger individuals, in economies with a higher tax wedge, for ex-ante lower ability individuals.