Essays on Macroeconomics With Firm Heterogeneity

Abstract

This dissertation consists of three chapters. Chapter One surveys the literature on quantitative heterogeneous agent macroeconomics, with a focus on firm heterogeneity. Chapters Two and Three are essays, both of which contribute to the research agenda that centers on using micro data to inform aggregate structural models, with an emphasis on the link between micro-level heterogeneity and macro- level outcomes. In Chapter Two, I propose a quantitative general equilibrium model of firm dynamics and show that intangibles play a key role in understanding two important macroeconomic trends of the U.S business sector over the past three decades: (i) declined measured labor income share and (ii) increased concentration in terms of the employment share and market share of the largest firms. The model is consistent with important aspects of firm behavior at the micro level. I show that an intangible-investment-specific technical change (IISTC) shifts the distribution of firms toward large, intangible-intensive firms with low labor shares. When the IISTC is calibrated to match the observed decline in the relative price of intangible investment goods, the model accounts for more than 90% of the observed rise in concentration and around 50% of the observed decline in the measured labor share. In Chapter Three, Shijun Gu and I examine the secular decline in new business creation. The U.S. economy has experienced a significant drop in the formation of new businesses since the early 1980s. However, there is no consensus regarding the main driving force. While both changes in entry costs and the persistence of shocks to productivity are potential candidates, neither can be directly observed from the data. Furthermore, their implications on aggregate productivity and welfare could be vastly different. We develop a quantitative general equilibrium model of entrepreneurship to identify and quantify their relative importance in explaining the observed declines in new business creation. We find that the relative contribution of higher entry cost is 1.5 to 2 times larger than that of higher persistence of shocks. Moreover, the increases in entry cost have led entrepreneurs to pay 15% more in terms of their first year’s profit to start a business.