Essays on Government Policy and Productivity

Abstract

This dissertation studies the effects of government policy on aggregate productivity by studying how government policy affects the allocation of resources across firms. Chapter 1 describes the data used in the following chapters. importantly, this data set is a plant level census of the manufacturing sector in Chile which allows to study government policy while taking into consideration firm heterogeneity. Chapter 2 was written jointly with Fausto Patiño Peña. It quantifies the effect of effective corporate tax rates on aggregate TFP through allocative efficiency. First, using the data described in Chapter 1 for the years 1998 to 2007 several characteristics of the effective tax rate distribution are documented. Two important findings are a large dispersion in the effective tax rate faced by firms and a mass of firms with a 0 percent tax rate. Next, these features are incorporated into a standard monopolistic competition model with capital and output wedges, where firms endogenously choose the tax rate they face. The model is then calibrated and the main finding is that if there were no corporate taxes in the economy, TFP would increase between 4 and 11 percent. Afterward, the effects of imposing the same tax rate on all firms are studied. A monotonically decreasing relationship between the level of the flat tax rate and TFP is found. Finally, Chapter 3 studies the interaction between financial frictions and firing costs and its effects on allocative efficiency and aggregate productivity. In particular, it quantifies the effect on aggregate productivity of an improvement in financial development in economies with firing costs. To do this, a small open economy model with heterogeneous firms that face collateral constraints and have to pay firing costs is developed. The model is then calibrated using the data described in Chapter 1. The main finding is that aggregate productivity increases by 2.5 percent following a financial reform that makes Chile's level of financial development comparable to that of the United Kingdom.