Economics Theses and Dissertations
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Item Financial Market Access and International Risk Sharing(2009) Araujo, Juliana; Végh, Carlos; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)In the past three decades the stock of assets and liabilities of developing countries measured as a ratio of GDP has tripled. It is commonly believed that an increase in opportunities for diversifying risk allows more consumption smoothing. However, the data show that volatility of consumption in developing countries has persisted at high levels, showing only an average 11 percent decrease from the 60's to the 90's. This paper aims to explain this phenomenon by investigating to what extent domestic financial frictions related to heterogeneous home financial market access can help resolve the quantitative discrepancy between the change in volatility of consumption in the data and that predicted by a model economy that allows for higher degrees of financial integration. We show that in an endowment economy, if only 40 percent of the population has access to financial markets, full access to insuring country risk in international markets would reduce consumption volatility by 24 percent. In a world in which all agents have equal access to financial markets, the predicted impact of integration with world markets would be a much higher drop of 49 percent. The absence of a forward international market for the nontradable good and the inability of some agents to access a forward market for the tradable good opens a new role for the spot market of tradable and nontradable goods: individuals excluded from financial markets use the goods market to attenuate tradable risk, which is reflected in higher consumption volatility for these agents following international financial integration. In an extended version of the model allowing for production, opening the economy brings even less change in consumption volatility. Later, we investigate whether limited domestic financial market participation can break the theoretical result found by Backus and Smith (1993) that consumption ratios and the real exchange rate are perfectly correlated for pairs of countries. We consider a two-country world inhabited by individuals with heterogeneous access to financial markets in one country and full access in the other. Both countries are endowed with tradable and nontradable goods. We find that consumption ratios for individuals with access to financial markets are perfectly correlated with the real exchange rate across countries but the aggregate consumption ratio and the real exchange rate might not be perfectly correlated across countries.Item ESSAYS ON HOUSING INVESTMENTS IN EMERGING MARKETS(2009) Qi, Zhikun; Vegh, Carlos; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)New residential construction is significantly more procyclical in emerging markets than in developed countries, although the correlation between aggregate investment and output is similar across emerging and developed countries. This paper shows that a multi-sector stochastic growth model with a housing production sector can explain this fact. The key feature of the model is that housing demand depends on the cyclical behavior of consumption of tradable goods, which is much more volatile in emerging markets. Therefore, when a positive productivity shock hits the economy, the larger response of consumption of tradable goods implies that it is more attractive for consumers in emerging markets to purchase housing than it is for consumers in developed countries. This paper considers various factors that contribute to the large variability of consumption in emerging markets, and finds that larger trend growth rate shocks in emerging markets than in developed countries are quantitatively important. The reason is that a positive productivity shock signals even higher productivity in the future with large growth rate shocks, so the current consumption response is large and the return to housing investment is high. While qualitatively the model matches the differences in the cyclicality of new residential construction across emerging markets and developed countries, quantitatively the model underestimates this comovement and the volatilities in housing investment in emerging markets. Furthermore, international interest rate shocks highly correlated with productivity shocks are very important in explaining the large swings in housing investment in emerging markets. Interest rate shocks work through three channels to affect housing investment: the direct `mortgage rate' effect, the indirect effect through increasing non-housing consumption and the supply effect due to the working capital constraint. Quantitatively, the direct `mortgage rate' effect is the most important channel. When the housing asset acts as collateral to reduce household's financing costs, it provides an empirically important mechanism to amplify and propagate interest rate shocks over the business cycle. The reason is that housing prices and interest rates reinforce with each other to generate more procyclical housing investment and more volatile consumption and output.Item Essays on Self-Employment and Entrepreneurship(2009) Rasteletti, Alejandro Gabriel; Haltiwanger, John; Shea, John; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation consists of three chapters studying different issues related to self-employment and entrepreneurship. The first chapter studies the effects of labor market frictions and credit constraints in an economy with self-employment. Two types of self-employed workers emerge in the model: (i) entrepreneurs and (ii) workers using self-employment as a stopgap. I show that labor market frictions generate a motive not to transition into self-employment, by making selfemployment a choice that takes time to reverse. At the aggregate level, these frictions also reduce the average size of entrepreneurs' businesses. Meanwhile, even if credit constraints are of particular importance for entrepreneurs, they also affect the stopgap self-employed. When credit constraints are tighter, fewer vacancies are posted, which increases the number of workers using self-employment as a stopgap in equilibrium. In the second chapter, I use data from the PSID to study the characteristics of workers using selfemployment as a stopgap while searching for another job, vis-à-vis those of other self-employed workers. The data reveals that stopgap self-employment is relatively high among young workers and those who experienced unemployment. Furthermore, the probability of entering self-employment increases monotonically with wealth for those not using self-employment as a stopgap, while it has an inverted U shape for those using self-employment as a stopgap. I also find that being unemployed increases the probability of becoming stopgap self-employed, but has no effect on the probability of becoming self-employed for other reasons. The third chapter examines the impact of exogenous technological growth on entrepreneurship and unemployment. The model developed in that chapter predicts that in the absence of labor market frictions, technological growth has an effect on entrepreneurship if and only if it affects an entrepreneur's capacity to manage workers. When labor market frictions are present, technological growth may have a positive or negative impact on entrepreneurship and unemployment. The desirable outcome of an increase in the rate of technological growth enhancing entrepreneurship and dampening unemployment is more likely to be obtained when the interest rate does not increase significantly with growth, technological change is disembodied, and growth enhances entrepreneurial ability at managing workers.Item TO LOHN OR NOT TO LOHN--A PUZZLE IN SUBCONTRACTING ARRANGEMENTS: THEORY AND EVIDENCE(2009) Andrei, Simona Cristina; Betancourt, Roger; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)The dramatic increase in outsourcing has led to a burgeoning theoretical literature that tries to explain the associated organization of production. So far the literature has focused solely on analyzing the determinants of decisions by outsourcing firms, but has ignored the firms to which production is outsourced. This dissertation bridges this gap in the literature by studying outsourcing decisions not from the point of view of the outsourcing firm alone, but as a joint process that actively involves the manufacturer to whom production is outsourced. We focus on a particular form of international outsourcing, also known as the lohn system , in which the outsourcing firm provides the manufacturer with inputs needed to produce and then re-imports the final goods. We use an incomplete contracts framework to develop a theoretical model that shows that the lohn system is more likely to be adopted the lower the manufacturer's ability to find low-cost inputs; the lower the bargaining power of the manufacturer; and the lower the degree of relationship-specificity. In order to test empirically the predictions of the theoretical model we exploit two unique firm-level databases with monthly data on physical production and balance sheet items for a large number of firms in Romania. We use the data sources to construct two data sets, at the firm and firm-product level, respectively. We present firm-level results for cross-sections for the years 2005 and 2006, while at the firm-product-level we provide results for both cross-section and panel data. Our empirical findings support the main predictions of the theoretical model. For instance, measuring the bargaining power of the manufacturer as the ratio of domestic to export sales, we show that the lower this ratio is, the more likely it is that the manufacturer will adopt the lohn system. Similarly, we find that the lower the firm or product specificity, the higher the use of the lohn system. Using firm age as a measure of its ability to obtain the low-cost input provides mixed evidence for our theoretical prediction. Our results are robust to the use of different estimation procedures, measures, and samples.Item Product Differentiation in International Trade(2009) Gervais, Antoine; Limao, Nuno; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This thesis is concerned with the role of product quality in explaining observed price and trade patterns. The first chapter introduces the topic, summarizes the main findings of the dissertation and contrasts them to other results in the literature. The second chapter develops a tractable general equilibrium model that includes quality differentiation among heterogeneous firms. The theory explicitly demonstrates how heterogeneity in a single exogenous parameter, productivity, can produce dispersion in product quality and price. The framework predicts that relatively productive firms will choose to produce high quality varieties. This finding accords well with the observation that the unit value of exported varieties increases with exporter's income, capital- and skill- abundance. The model is used to analyze how international trade policy and quality differentiation interact to shape patterns of production and trade flows. In particular, the model predicts a positive relationship between product quality and export status at the firm level and that trade liberalization decreases the average quality of a country's exports. The third chapter evaluates the importance of vertical product differentiation in explaining price and export status patterns observed in microdata on U.S. manufacturing plants. The main difficulty in exploring the impact of vertical product differentiation is that product quality is not directly observable. The analysis tackles the problem from two angles. First, the chapter develops a novel empirical strategy to obtain a proxy for quality, which is then used to evaluate important conditional correlations. The results show that both quality and productivity are important determinants of price and export status pattern. Second, the simulated method of moments is used to obtain structural estimates of the parameters of the model and to assess the importance of quality differentiation. The estimates suggest that quality differentiation plays an important role in explaining the variation in price, size and export status across U.S. manufacturing plants. The fourth chapter briefly concludes by summarizing the main findings and suggesting avenues for future research. Overall the analysis presented in this dissertation implies that vertical product differentiation, or quality, plays an important role in explaining dispersion in producer output price and export status.Item THE EFFECTS OF UNINSURANCE ON HOSPITALS AND PATIENT HEALTH(2009) Daysal, Meltem; Hellerstein, Judith; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)During the past few decades, the United States health care market has experienced dramatic changes. One feature of the health care market that has stayed constant is the persistently large number of Americans who lack health insurance coverage. To date, research has primarily focused on how lack of insurance affects an individual's own health outcomes, health care utilization and economic well-being. Little is known about how the uninsured affect the provision of care to insured patients. In this dissertation, I aim to increase our understanding of the community effects of uninsurance in two distinct but closely related areas: patient health outcomes and hospital treatment patterns. In the first essay, I examine the impact of uninsured patients on the health of the insured, focusing on one health outcome — the in-hospital mortality rate of insured heart attack patients. Overall, my results indicate that uninsured patients have an economically significant effect that increases the mortality rate of insured heart attack patients. I show that these results are not driven by unobserved characteristics of insured heart attack patients or hospitals and that they are robust to a host of specification checks. In the second essay, I examine the impact of the uninsurance rate in the health care market of a hospital on its uncompensated care burden and on the provision of care to heart attack patients. My analysis suggests that the defaulted payments by uninsured patients impose a large fiscal burden on hospitals. I also find that hospitals make changes to their provision of care to heart attack patients when faced with higher uninsurance rates. In particular, my results suggest that hospitals are more likely to use intensive procedures and less likely to conduct these procedures in an inpatient setting when market uninsurance rates increase.Item ENDOGENOUS INSTITUTIONAL CHANGE: THE TRANSFORMATION OF THE STATE-LOCAL RELATIONSHIP IN THE UNITED STATES(2009) Hennessey, Jessica Lynne; Wallis, John J; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This thesis focuses on the changing relationship between state and local governments. I explore state-level constitutional changes in the 19th and early 20th century with respect to the governance and organization of municipalities. The rich heterogeneity across state constitutions gives us an opportunity to understand the underlying political and economic forces at work, using a fiscal federalism and political economy framework. There are parallels between state-level constitutional changes regarding private corporations and the less well understood changes instituted for public corporations such as municipalities. The adoption of municipal general legislation stemmed from similar problems of special interests and political maneuvering under special legislation. In some states, general legislation protected municipalities from unwanted abuse by state-level politics, and provided a uniform structure under which all local governments could operate and easily gain access to the corporate form. However, as in the case of private corporations, the one-size-fits-all rubric of general legislation was often not amenable to all municipalities. Some states implemented a Pareto-improving solution, which is to have general legislation available for those well served by it, and to give municipalities the flexibility to self-select and independently charter themselves. The resolution to grant home rule to municipalities retained the political security afforded by general legislation and provided the freedom of organization to those who needed it most. The thesis is organized as follows. Chapter 2 documents the history of the relationship between states and their municipalities. The chapter also discusses the various problems states had in maintaining the original setup of passing special laws for municipalities. Chapter 3 evaluates the changing economic and political conditions which may influence a state's choice of how to structure the state-municipal relationship. Chapter 4 looks at one institutional change, the adoption of home rule. By using a unique municipal-level dataset, I empirically investigate why certain states may have adopted this institution. Chapter 5 considers another form of local government, the school district. The patterns seen in the state-municipal relationship are mirrored in the state-school district relationship.Item Firm Owners and Workers: An Analysis of Immigrants and Ethnic Concentration(2009) Garcia-Perez, Monica I.; Haltiwanger, John; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation consists of three chapters examining the important role of firm and coworker characteristics, as well as the use of social networks, in labor markets. The first paper investigates the effect of firm owners and coworkers on hiring patterns and wages. Immigrant-owned firms are more likely to hire immigrant workers. This prevalence is especially strong for Hispanic and Asian workers. We also find that the probability that a new hire is a Hispanic is higher for immigrant firms. On wage differentials, the results illustrate that much of the difference between the log annual wages of immigrants and natives can be explained by immigrants' propensity to work in non-native owned firms, which pay the lowest average wages. Interestingly, though, native workers holding a job in immigrant firms are paid less than immigrant workers. The last section examines the potential mechanisms for these findings. It explores the importance of job referral and use of networks for migrants in labor markets. We consider the theoretical implications of social ties between owners and workers in this context. Firms decide whether to fill their vacancies by posting their offers or by using their current workers' connections. Next, we explore the patterns of immigrant concentration relative to native workers at the establishment level in a sample of metropolitan areas. Immigrants are much more likely to have immigrant coworkers than are natives, and are particularly likely to work with others from the same country of origin, even within local markets. The concentration of immigrants is higher for recent immigrants and interestingly for older immigrants. We find large differences associated with establishment size that cannot be explained solely by statistical aggregation. Exploring the mechanisms that underlie these patterns, we find that proxies for the role of social networks, as well as the importance of language skills in the production process, are important correlates of immigrant concentration in the workplace.Item ESSAYS IN EMPIRICAL INDUSTRIAL ORGANIZATION(2009) Chesnes, Matthew William; Rust, John; Jin, Ginger; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Chapter 1: Capacity and Utilization Choice in the US Oil Refining Industry This paper presents a new dynamic model of the operating and investment decisions of US oil refiners. The model enables me to predict how shocks to crude oil prices and refinery shutdowns (e.g., in response to hurricanes) affect the price of gasoline, refinery profits, and overall welfare. There have been no new refineries built in the last 32 years, and although existing refineries have expanded their capacity by almost 13% since 1995, the demand for refinery products has grown even faster. As a result, capacity utilization rates are now near their maximum sustainable levels, and when combined with record high crude oil prices, this creates a volatile environment for energy markets. Shocks to the price of crude oil and even minor disruptions to refining capacity can have a large effect on the downstream prices of refined products. Due to the extraordinary dependence by other industries on petroleum products, this can have a large effect on the US economy as a whole. I use the generalized method of moments to estimate a dynamic model of capacity and utilization choice by oil refiners. Plants make short-run utilization rate choices to maximize their expected discounted profits and may make costly long-term investments in capacity to meet the growing demand and reduce the potential for breaking down. I show that the model fits the data well, in both in-sample and out-of-sample predictive tests, and I use the model to conduct a number of counterfactual experiments. My model predicts that a 20% increase in the price of crude oil is only partially passed on to consumers, resulting in higher gasoline prices, lower profits for the refinery, and a 45% decrease in total welfare. A disruption to refining capacity, such as the one caused by Hurricane Katrina in 2005, raises gasoline prices by almost 16% and has a small negative effect on overall welfare: the higher profits of refineries partially offsets the large reduction in consumer surplus. As the theory predicts, these shocks have a smaller effect on downstream prices when consumer demand is more elastic, resulting in a larger share of total welfare going to the consumer. Chapter 2: Consumer Search for Online Drug Information Consumers are increasingly turning to the internet and using search engines to find information on medicinal drugs. Between 2001 and 2007, the number of adults using the internet as an alternative source of health information doubled. At the same time, online and offline advertising spending by drug companies is growing rapidly. I seek to understand how consumers use search engines to find drug information and how this activity is influenced by direct to consumer advertising. I utilize a database of user click-through data from America Online to analyze the search behavior of consumers seeking drug information online. Compared with other searches, users submitting drug-related queries are more likely to click on more than one result in a search session, and when they do, they click more rapidly through the results and tend to migrate away from dot-com sites and toward those ending in dot-org and dot-net. Offline advertising on a drug serves to increase the frequency and intensity of these searches. Chapter 3: Drug Information via Online Search Engines This paper utilizes a database of organic and sponsored search results from four large search engines to analyze the supply of drug-related information available on the internet. I show that the information varies significantly across search engines, domain extensions, and between organic and sponsored results. Regression results reveal that websites with relatively more promotional content are pushed down in the search results while informational sites (including those ending in dot-gov and dot-org) are more likely to appear on page one of the results.Item Friends and Partners: The Impact of Network Ties(2009) Cangiano, Giulia Cristina; Murrell, Peter; Kranton, Rachel; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)How does a high-tech entrepreneur find the most qualified engineer for her startup? How does a scientific inventor acquire funding or recruit the best partner for his project? In chapter 1 I develop a discrete matching model with heterogeneous values and an undirected social network to address these questions. My model offers a framework to study how relative network positions affect payoffs and incentives. While an entrepreneur's expected return increases with the size of her own network, the network externalities from competing entrepreneurs are more complex. There is a tradeoff between the size of an entrepreneur's network and the competitive externality she exerts. When an entrepreneur's network increases, her closest competitors are hurt, but her less similar competitors may actually have a better chance of finding a suitable partner. In a more connected network, fewer frictions interfere with compatible matches. Results are consistent with observable patterns in high-tech and biotechnology in Silicon Valley and Massachusetts, as well as the turn of the 20th century German synthetic dye manufacturing. Initiatives to promote social networks within innovative sectors are critical and deserve future research. In Chapter 2 I consider a two-period endogenous network search model in which entrepreneurs build relationships with specialists. The model includes a period of costly network search and applies results from my companion paper. In the presence of network externalities, entrepreneurs over-invest in networking. Networks in which is it not costly to build new relationships are the least efficient. While positive externalities reduce this problem some negative inefficiencies will likely prevail. Networks in which participation is cheap - such as online career networks LinkedIn or Monster.com - have limited information about individual specialists and are the most inefficient. A network that is costly to participate in, but is more effective at targeting entrepreneur's search for qualified candidates results in a more compatible and, likely, efficient partnership. These networks might include alumni groups, trade associations or head-hunters. This chapter provides one explanation for the varied successes of government programs in fostering effective business networks. Efficient networks foster fewer, more specific relationships.