A firm foundation: essays on firm choice

Abstract

This dissertation consists of three essays.In the first essay, Kai Ding and I develop a dynamic general equilibrium model in which a change in the importance of firm specific human capital can explain the new pattern in labor productivity as well as partially account for the decrease in the rate of employment recovery (jobless recoveries) observed in the most recent three recessions. Additionally, we present empirical support that the importance of firm specific human capital has in fact increased for recent recessions.In the second essay, David Perez-Reyna and I incorporate theft in a macroeconomic setting with the goal of understanding the effects of public law enforcement (PLE) on the incarceration rate, aggregate output and average welfare. Our primary finding is that there exists a non-monotonic relation between the level of PLE and all three of these aggregate variables. In particular, for countries with relatively small amounts of PLE, there is an inverse relationship between PLE and both aggregate production and welfare primarily due to an increase in the incarceration rate. However, for countries with higher levels of PLE, the level is positively related to production and welfare and inversely related with the incarceration rate. When applied to a dynamic model, our mechanism can explain why we observe such a large difference in the level of PLE across countries.In the third essay, David Perez-Reyna and I present a general equilibrium model where heterogeneous consumers endogenously choose whether to become workers, consumers or entrepreneurs in order to analyze how limits on the leverage of banks affect real output. In our model tighter limits on the leverage of banks cause an increase in the spread between the interest rate that banks charge for loans and the interest rate that banks pay for deposits. A higher spread results in two types of distortions: First, firms with the same productivity will have different size. Second, productive firms will cease to exist, while nonproductive ones will enter. These distortions result in lower production.