Economics Theses and Dissertations
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- ItemLIVE and FIVE Estimation of Simultaneous Equations Models with Higher-Order Spatial and Social Interactions(2022) Chen, Jiankun; Prucha, Ingmar; Sweeting, Andrew; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)The first part of the dissertation introduces a new class of limited and full information GMM estimators for simultaneous equation systems (SEM) with network interdependence modeled by Cliff-Ord type spatial lags (Cliff and Ord (1973, 1981)). We consider the same model specification as that in Drukker, Egger, and Prucha (2022) and allow for higher order spatial lags in the dependent variables, the exogenous variables and the disturbances. The network is defined in terms of a measure of proximity and can accommodate a wide class of dependence structures that may appear in both micro and macro economic settings. We show that the scores of the log-likelihood function can be viewed as a weighted sum of linear and quadratic components that motivate valid moment conditions. One contribution of this dissertation is showing that the linear moments can be written to permit instrumental variable (IV) interpretation, extending on the existing results in the context of classical SEMs. Towards constructing the linear moments, the instruments exploit the nonlinear structure of the parameters implied by the reduced form model, while those utilized by the existing 2SLS- and 3SLS-type estimators do not. From this perspective, the new estimation methodology incorporates the ideas underlying the LIVE and the FIVE estimators in Brundy and Jorgenson (1971) for classical SEMs, as well as the IV estimators using optimal instruments for spatial autoregressive (SAR) models. In addition to the linear IV estimators, we also consider one-step GMM estimators that utilize both the linear and quadratic moments implied by the scores. Our new LIVE and FIVE estimators for the network SEMs remain computationally feasible even in large sample and are robust against heteroskedasticity of unknown form. Monte Carlo simulations show that the new estimators in general outperform the existing 2SLS- and 3SLS-type estimators for this class of models when the instruments are weak. In the second part of the dissertation, we estimate the consumer demand for gasoline in the market of Vancouver, Canada. We employ a demand system with a spatial network component, utilizing the model and the estimation methods considered in the first part. Demand elasticity for gasoline at aggregate level are well documented in the literature, while estimates at station level are relatively scarce. We estimate the station-level demand elasticities as well as (spatial) elasticity of substitution under a variety of network structures based on different proximity measures. We collected station-level data on retail prices, sales volume, station characteristics of the 151 stations, as well as the characteristics of local markets, for September 2019 as well as March 2020. To deal with the endogeneity of prices, existing works typically exploit variations in the characteristics of each station’s direct competitors. We argue that in a geographically continuous market, this strategy may not be sufficient. In spirit of Fan (2013), our instruments also exploit the variations in the characteristics of the competitors of each station’s competitors (indirect competitors). We find that the own-price demand elasticity is between −12 and −4 while the cross-station price elasticity is in general between 0.6 − 6, depending on the construction of the network matrices that governs the degree of competition. We also report the impact measures that provides interpretations on the estimated coefficients of the exogenous variables in the context of spatial network models. We find that the availability of service station in general have contributed positively on the sales volume at a station. In general, a station located within a neighborhood of more drivers face stronger demand.
- ItemESSAYS ON FIRM DYNAMICS AND MERGERS AND ACQUISITIONS(2022) Chiu, Liang-Chieh; Haltiwanger, John; Stevens, Luminita; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation studies the impact of horizontal mergers on firm dynamics, innovation, and aggregate economic growth. In Chapter 1, I investigate how firms’ incentives to pursue in-house innovation versus acquisitions shape aggregate innovation and growth. I develop a tractable growth model with heterogeneous firms in which incumbent productivity evolves through engaging in endogenous innovation or through search and matching with innovative acquisition targets. The key innovation on the modeling side is the simultaneous inclusion of both R&D and M&A activities to capture potential spillovers from one activity to the other. With the model parameterized to match a set of facts on the U.S. M&A activity as well as moments of the R&D-to-sales ratio, the long-run growth rate and the entry rate of new entrants, I show that M&A activity accounts for 11.6% of U.S. long-run productivity growth during the period between 1979 to 2000. To explore the implications of M&A for aggregate innovation and aggregate economic outcomes, I perform a counterfactual analysis using the calibrated model to trace the effects of a looser merger policy on firm-level innovation, selection into the M&A market and aggregate growth. I find that a looser merger policy incentivizes small firms to innovate more while reducing the R&D investments of large firms. Overall, the quantitative analysis suggests a beneficial impact of M&A on aggregate growth and welfare. Chapter 2 examines how merger policy affects M&A activity across the firm size distribution. I study firm responses to a specific merger policy change implemented in the United States in the year 2001: the change increased the transaction threshold for required pre-merger notifications pursuant to the Hart-Scott-Rodino Act. I construct a difference-in-difference research design to study the change in the number of horizontal mergers pre- and post-amendment, in comparison to non-horizontal mergers for each size group. I find that the increase in the exemption threshold stimulates merger activity among always-exempt competitors. The results contrast those of Wollmann (2019), who found significant increases in newly-exempt horizontal mergers. I trace the difference to the misclassification of merger size and measurement issues in transaction values in the original study. The impact of the HSR amendment on always-exempt horizontal mergers can be interpreted as an entry effect or a spillover effect of deterrence. As found in chapter one, a relaxed merger policy endogenously lowers the entry threshold, and thus more small firms comprise the firm size distribution. This may lead to more small transactions following the amendment in the long run. Another potential effect is the spillover effect of antitrust enforcement. Mergers that were slightly below the original transaction threshold ran the risk of being investigated, so the parties may have been discouraged from merging under the original policy.
- ItemESSAYS ON INTERNATIONAL FINANCE AND DEVELOPMENT(2022) Paranagua de Vasconcelos Teixeira, Marcelo; De Leo, Pierre; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Motivated by exposure to different financing programs from the International Finance Corporation (IFC), in this dissertation I explore three relevant topics from the perspective of a Development Finance Institution (DFI), focusing on outcomes that spam across the development of local capital markets, attraction of foreign direct investment, poverty reduction and firm growth in developing economies.The first chapter studies the pioneering role of DFIs in issuing local currency bonds in several developing economies’ domestic capital markets, investigating the potential effects on capital markets development and attraction of foreign direct investment flows. Results on bonds markets show an increase on number of listings of both public and domestic corporate bonds following a pioneer issuance, while also pointing to an increase in the number of domestic corporate bond issuers. The analysis of effects on the equity markets of local exchanges shows an increase in the number of domestic companies with listed equities following the pioneer issuances, and an even stronger increase in the number of foreign companies with listed equities in the domestic exchange, suggesting that the potential signaling effect from the pioneer local currency bond issuances is stronger for international agents than for domestic agents. Lastly, the analysis of the effects on the attraction of FDI shows that FDI net inflows decrease after such pioneer issuances, which suggests that FDI and capital markets development would be substitutes. However, when I disaggregate sample countries by different stages of market development, as proxied by countries’ income level, I find that the decrease in FDI is mostly seen in low and lower-income countries, while in upper-middle countries FDI inflows and capital market development would be less of a substitute, pointing to a transition from substitutability to complementarity as capital markets and institutions become more mature. The second chapter analyzes – through an innovative structural simulation modeling approach that links investments in one or more industries to the World Bank Group (WBG) twin goals of ending extreme poverty and improving shared prosperity – the expected impacts that private investment strategies could have in the Philippines, focusing on impacts on poverty and inequality, while also including standard macroeconomic effects like economic growth and employment. A key factor in this model is the presence of both formal and informal markets, which captures the high and persistent job informality observed in the data. While FDI inflows drive the growth of formal activity in the economy and creates higher paying direct jobs, the indirect and induced effects are weakened by the high presence of informal firms in the supply chain, which are less productive and pay smaller wages. By comparing FDI investments into manufacturing, agriculture, services, and tourism, results show that a “trickle-down” growth approach based on the continuation of the status quo does not deliver the poverty and shared prosperity targets of the WBG twin goals. While poverty declines due to additional investment, considerably higher investments would be needed to reach the 3 percent WBG (global) poverty target. Moreover, inequality increases over time and no substantial progress is observed in terms of shared prosperity in any of the investment-driven scenarios. Finally, the third chapter estimates the relationship between working capital and firm growth for a large sample of companies across developing economies, underlying the rationale and expected impact of providing working capital financing in these countries. The paper presents a measure of excess working capital – the difference in the level of working capital for a firm relative to the median of its relevant peers by sector and economic context – and finds evidence of a non-linear relationship between excess working capital with firm growth. Companies with relatively lower levels of working capital but closer to industry and economic environment norms would benefit the most in terms of sales growth, followed by firms with the lowest levels of working capital. Companies with working capital levels above the norm benefit the least from additional working capital. These facts constitute evidence of the existence of a notional optimal level of working capital, conditional to industry and economic context, consistent with existing literature, mostly focused on developed countries. Additional results show that the marginal impact of increasing working capital on growth is larger for firms in more developed countries. Along these lines, these findings can serve as a basis to explain (partially, at least) firm performance during the COVID-19 crisis and going forward, as well as being an input to improving the allocation of working capital financing in the recovery and beyond.
- ItemESSAYS ON INTERNATIONAL TRADE AND THE ENVIRONMENT(2022) Lim, Heehyun Rosa; Limão, Nuno; Lee, Eunhee; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation examines the relationship between international trade and environmental outcomes. In particular, I study the impact of international trade on airborne pollutants, including the change in emissions and concentration as well as their welfare consequences. In the first chapter, I suggest the intermediate import channel as a new perspective to understand the linkage between international trade and air pollutant emissions. I first review the existing literature's understanding of the impact of trade on emissions. The review shows that the literature mostly focuses on the increased market access but overlooks the increased access to imported inputs. Using the data on the US manufacturing industries, I then document a few stylized facts that are suggestive of the linkage between intermediate imports, input usage, and emissions. I show that in the US, the import penetration among inputs used has increased while the energy intensity of US manufacturing has declined, the latter of which explains a third of the within-industry reduction in $NO_x$ emission intensity. To analyze the channels by which trade in intermediate inputs affects emission intensity, I build a model of heterogeneous firms, intermediate trade, and inputs with different emission profiles. By focusing primarily on the emissions linked with input usage, my model examines the effect of improved access to foreign intermediates on firms' input choices and emission outcomes. The model shows that with lower intermediate import costs, firms become less energy-intensive by either increasing their intermediate intensity, using energy-saving technology, or both. Moreover, the general equilibrium force, as well as amplification through the input-output linkage, bring a further decrease in emission intensity in all firms. The model also presents the selection and reallocation effect which further amplifies the within-firm improvements. In the second chapter, I run empirical and quantitative analyses to test the theoretical model from the first chapter against the US manufacturing data. In the empirical analysis, I estimate the model prediction, which states that industry-level emission intensity can be expressed in the producer price index when the cost of energy and market access are controlled,using the industry-level panel data between 1998 and 2014. By using the import price of intermediates as an instrumental variable for the producer price index, I find evidence that a lower producer price, driven by a lower intermediate import price, leads to lower $NO_x$ emission intensity. The reduced-form evidence supports the model mechanism that states that a lower import price of intermediates decreases emission intensity. I then calibrate the model to 1998 aggregate US manufacturing and quantify the change in emission intensity driven by the change in intermediate import cost. The quantification shows that the fall in intermediate import cost between 1998 and 2014 explains about 8-10\% of the observed technique effect in $NO_x$ emissions. 68\% of the decrease comes from the within-firm changes via firms' substituting away from energy inputs, global sourcing, and adopting energy-saving technology, which highlights the importance of taking within-firm channels into account to understand the effects of trade policies on emissions. The third chapter (co-authored) re-examines the welfare gains from international trade by incorporating the transboundary nature of air pollutants.\footnote{This chapter is from a joint work with Eunhee Lee.} We run country-level panel regressions and find that concentration is correlated with transboundary pollution, constructed as the weighted sum of other countries' emissions. We then build a general equilibrium model of international trade and environmental externality from local pollutants of transboundary nature, in which the concentration of a country is affected by both its own and other countries' emissions. The model shows that the change in welfare can be decomposed into the change in real income and the change in air pollutant concentration, the latter of which can further be decomposed into that driven by own emissions and by other countries' emissions. We use this model to quantify the welfare implications of two trade shocks -- China shock and the EU 2004 enlargement. The results show multiple channels that shape heterogeneous welfare consequences across countries. First, liberalizing countries experience an increase in emissions due to an increase in production. Second, the emissions of other countries move in either direction, depending on the effects of pollution relocation and increased production due to cheaper inputs. Third, the levels of concentration increase in liberalized countries and some other countries due to the increase in own emissions or transboundary pollution, or both. We run additional counterfactual exercises with stricter environmental regulations imposed on liberalized countries and show that there can be welfare gains in many countries by lowering emissions and transboundary pollution, suggesting the potential effects of combining trade and environmental policies.
- ItemESSAYS ON RATIONAL INATTENTION IN INDIVIDUAL AND STRATEGIC DECISION MAKING(2022) Domotor, Erika; Ozbay, Erkut; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Chapter 1 revisits the model of adverse selection under asymmetric information with the power of the rational inattention framework. I depart from the setup of Akerlof (1970) by revising its extreme information asymmetry assumption. Instead of assuming that the Seller is fully informed and the Buyer is fully uninformed, I consider a setting in which both parties areable to gather information, but at a cost. As a result, both the Seller and the Buyer become partially informed, and the information asymmetry is the consequence of the asymmetry in their incentives and unit information costs. This enhanced framework provides new insights into the implications of incomplete information for market outcomes, efficiency and welfare. When information asymmetries occur endogenously, they do not lead to market collapse, but they do create market inefficiencies. The Buyer is better off and the Seller is worse off compared to the efficient symmetric information benchmark. In Chapter 2, I propose a model that explains the evolution of overconfidence as being a result of the constrained utility-maximizing problem of a decision maker who is rationally inattentive to information, but at the same time biased towards more optimistic subjective beliefs.Empirical studies have shown that individuals with initially fewer skills have more confidence, but as their skill level increases, their overconfidence decreases. The phenomenon is well-known as the Dunning-Kruger effect in the psychology literature. I explain this effect by the simultaneous choice of subjective and objective information. In my model a non-materialistic utility component induces overly optimistic subjective beliefs, which are constrained by the cost of information distortion. The setup is tractable in a range of economic problems. Chapter 3 utilizes the Model of Overconfidence from Chapter 2 in an application which explains the excess entry and high drop out rate of entrepreneurs. In this setting I show that in the presence of overconfidence individuals enter businesses with lower than necessary skill levels to succeed. At the same time, they drop out due to underperforming even when their skill levels would be adequate to stay in, were they not overconfident. The gap between skill thresholds for entry and drop out results in the high failure rate of businesses.