Economics
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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 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 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.Item Effects of In-Group Bias in a Gift-Exchange Transaction: A Theory of Employee Ownership and Evidence from a Laboratory Experiment(2009) Bergstresser, Keith David; Sanders, Seth G.; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation presents a behavioral model of employee ownership and an experimental examination of the model. Chapter 1 reviews literature on employee ownership, gift-exchange, social preferences in experimental economics, and in-group bias. The model of employee ownership, presented in Chapter 2, incorporates in-group bias into a gift-exchange framework. Predictions of the model include higher productivity, higher profits, higher wages, and greater worker satisfaction in employee owned firms relative to otherwise identical publicly traded or private firms with no employee ownership. Chapter 3 presents the results of a laboratory experiment designed to test both the assumptions and the predictions of the model described in Chapter 2. In-group bias is found to affect the giving and trusting behavior, but not the reciprocal behavior of the subjects in the experiment.Item Civil Liberties, Mobility, and Economic Development(2009) BenYishay, Ariel; Betancourt, Roger R.; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)To what extent do civil liberties affect economic development? This dissertation addresses this question in two essays. The first chapter (joint with Roger Betancourt) provides a new economic interpretation of civil liberties as rights over a person's most basic human asset: her own self. The importance of these rights to economic development is based on the principle that property rights-defined over a broad set of "property''-are crucial for economic growth. The empirical literature to date shows little support for such claims related to civil liberties, however, with ambiguous evidence on the role of these rights in driving long-run growth. Using newly available data from Freedom House, we find that one of the recently disaggregated categories of civil liberties explains income differences across countries more powerfully and robustly than any other measure of property rights or the rule of law considered. This component, entitled "Personal Autonomy and Individual Rights,'' evaluates the extent of personal choice over issues such as where to work, study, and live, as well as a broader set of property rights and other choices. While the first chapter finds that greater civil liberties can substantially improve long-run economic development, the second chapter identifies a key friction in this relationship. In countries that lack complementary institutions, civil liberties governing individual mobility can complicate credit transactions. By allowing individuals to move to locations where less is known about their prior defaults, mobility freedoms induce opaqueness and can result in credit rationing. I develop an instrumental variable estimation to study these effects, which would otherwise be complicated by omitted variable bias and endogeneity. Using household survey data from Guatemala, I instrument for individual migration with the interaction of violence patterns and individual sensitivities toward that violence. Using this approach, I find that the act of migration within a country actually causes individuals to have significantly less access to credit, primarily because lenders are concerned about these borrowers' opportunistic default.Item Essays on Uniform Price Auctions(2009) Herrera Dappe, Matias; Cramton, Peter; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)When selling divisible goods such as energy contracts or emission allowances, should the entire supply be auctioned all at once or should it be spread over a sequence of auctions? How does the expected revenue in a sequence of uniform price auctions compare to the expected revenue in a single uniform price auction? These are questions that come up when designing high-stake auctions and this dissertation provides answers to them. In uniform price auctions, large bidders have an incentive to reduce demand in order to pay less for their winnings. In a sequence of uniform price auctions, bidders also internalize the effect of their bidding in early auctions on the overall demand reduction in later auctions and discount their bids by the option value of increasing their winnings in later auctions. This dissertation shows that a sequence of two uniform price auctions yields lower expected revenue than a single uniform price auction particularly when competition is not very strong. It is generally argued that forward trading is socially beneficial. Two of the most common arguments state that forward trading allows efficient risk sharing and improves information sharing. It is also believed that when firms can produce any level of output, strategic forward trading can enhance competition in the spot market by committing firms to more aggressive strategies. However, firms usually face capacity constraints, which change the incentives for strategic trading ahead of the spot market. This dissertation also studies these incentives through a model where capacity constrained firms engage in forward trading before they participate in the spot market, which is organized as a multi-unit uniform-price auction with uncertain demand. This dissertation shows that when a capacity constrained firm commits itself through forward trading to a more competitive strategy in the spot market, it actually softens competition in the spot market. Hence, its competitor prefers not to follow suit in the forward market and thus behave less competitively in the spot market than otherwise. Moreover, strategic forward trading generally leaves consumers worse off as a consequence of less intense competition in the spot market.Item Asymptotic Theory for Spatial Processes(2008-07-15) Jenish, Nazgul; Prucha, Ingmar R.; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Recent years have seen a marked increase in the application of spatial models in economics and the social sciences, in general. However, the development of a general asymptotic estimation and inference theory for spatial estimators has been hampered by a lack of central limit theorems (CLTs), uniform laws of large numbers (ULLNs) and pointwise laws of large number (LLN) for random fields under the assumptions relevant to economic applications. These limit theorems are the basic building blocks for the asymptotic theory of M-estimators, including maximum likelihood and generalized method of moments estimators. The dissertation derives new CLTs, ULLNs and LLNs for weakly dependent random fields that are applicable to a broad range of data processes in economics and other fields. Relative to the existing literature, the contribution of the dissertation is threefold. First, the proposed limit theorems accommodate nonstationary random fields with asymptotically unbounded or trending moments. Second, they cover a larger class of weakly dependent spatial processes than mixing random fields. Third, they allow for arrays of fields located on unevenly spaced lattices, and place minimal restrictions on the configuration and growth behavior of index sets. Each of the theorems is provided with weak yet primitive sufficient conditions.Item Productivity Dispersion, Plant Size, and Market Structure(2008-06-16) Bakhtiari, Sasan; Haltiwanger, John C; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Ample evidence from micro data suggests that productivity at establishment level is dominated by idiosyncratic factors. The productivity differences across establishments are very large and persistent even with the narrowest definition of industries. There is an attempt to identify sources of frictions that cause such productivity dispersion and negatively affect the average productivity of industries. This dissertation contemplates a non-monotonic relationship between productivity and input size and studies its importance in shaping the relationship between productivity dispersion and the producer size, a fact that is presented along with supportive empirical results. The role of market structure is then elaborated in creating the observed behavior. The US Census of Manufactures reveals significant productivity dispersion at any employment level. Moreover, this productivity dispersion falls with employment size within most manufacturing industries. This pattern is considerably strong for establishments in industries whose products are primarily locally traded. It will be shown that general approaches such as industry selection and simple statistical aggregation do not explain this pattern convincingly, while sector-specific factors such as market localization can mimic this behavior much more closely. Based on these results, a market structure model is introduced that uses demand size and market localization as constraining forces to generate a bell-shaped relationship between input size and productivity within a market and for locally traded goods. The non-monotonicity of the relationship is a clear departure from most economic models where input size of plants is monotonically increasing with their productivity in the long-run. Because of the bell-shaped relationship, the proposed model predicts significant long-run productivity dispersion at any level of input size. Also this dispersion decreases with input size, in the same way as is observed in the data. The model is calibrated and then simulated using data on Ready-Mix Concrete. First, the relationship between productivity and input size in the data is of a similar bell-shaped form. The effect of market size is also shown to be consistent with model predictions. Second, simulated results produce productivity dispersions that fall with input size with almost the same slope as observed in the data. This, in turn, suggests that the difference between simulated and actual productivity dispersions, summarizing the effect of other frictions, is almost uniform across sizes. Finally the robustness of the results is demonstrated through various tests. Throughout the discussion, a distinction is made between physical and revenue productivities and the theoretical implications of both measures are shown to be qualitatively the same.