ESSAYS ON FINANCIAL MARKET IMPERFECTIONS AND THE ENVIRONMENT

Abstract

The first chapter explores the effect of credit constraints on production-generated pollution emissions. I develop a theoretical model wherein polluting firms borrow externally to finance investment in various assets, subject to a credit constraint with lenders. The main insight of the model is that credit constraints distort the composition of assets towards over-investment in tangible assets, which can be pledged as collateral, thereby increasing the intensity of pollution emissions. The predictions of the model are tested using plant-level pollution emissions data for manufacturing plants from the EPA's Risk-Screening Environmental Indicators, and measures of creditworthiness from Dunn and Bradstreet. The empirical results indicate that credit constraints significantly increase pollution emissions (even after accounting for a countervailing scale effect) using both Pooled OLS and Fixed Effects, and the results withstand multiple robustness checks. Overall, I find that a one standard deviation in creditworthiness reduces pollution emissions by around 4.5 percent.

The second chapter focuses on the influence of household credit constraints in a general equilibrium framework on the composition of output in the "clean" and "dirty" industries and the pollution intensity of production, which in turn determines aggregate pollution emissions. I propose a simple two-sector model, where producer-consumers face credit constraints when young and, therefore, invest less in human capital. As a result, production is oriented towards more pollution-intensive industries and therefore entails more pollution. This prediction is supported for production-generated air pollutants SO2 and lead using both reduced-form and two-stage regressions.

The third chapter explores the role of tax policy in shaping incentives for corporate executive effort (labor supply) and rent seeking. This chapter develops a theoretical model that distinguishes between effort and rent-seeking responses and provides a framework to empirically quantify the two responses. Using executive compensation and governance data, this paper empirically demonstrates that rent seeking constitutes a quantitatively significant response to changes in marginal income tax rates. Finally, this paper provides another piece of evidence suggesting that tax cuts may be one factor leading to the rise in top incomes over the last three decades.