Author: Saeed Shaker Akhtekhane

Publisher:

Published: 2021

Total Pages: 0

ISBN-13:

In these essays, I study cross-country differences in productivity caused by misallocation of resources. Particularly, I examine the misallocation created by financial frictions as well as that created by entry barriers. In the first chapter, "Financial Frictions and Productivity Losses: Importance of Default-Led Heterogeneity in Collateral and Loan Rates", I develop a model of entrepreneurship with default to quantitatively analyze the impact of financial frictions on total factor productivity (TFP). Default risk justifies the need for collateral. Entrepreneurs are charged higher loan rates if the value of their collateral is low, which favors the wealthy over the poor, regardless of their talent, and discourages poor individuals from self-financing to start or expand their businesses. The close link between deposit rates and loan rates, in most models, is broken. Consistent with empirical evidence, my model can generate a weak self-financing motive while allowing for a highly persistent individual productivity, a challenge for existing models of financial frictions. Financial frictions in my model stem from three different sources: limited enforceability related to the recovery rate of collateral by financial intermediaries; informational frictions related to inefficiencies in financial intermediaries' evaluation of entrepreneurs' default risks; and frictions related to entrepreneurs' expectations of future loan terms. I use machine learning classification techniques to solve the problem financial intermediaries face evaluating entrepreneurs' default risks. My analysis shows sizeable losses from financial frictions, more than 40% in TFP losses for the U.S. if we were to replace its financial markets with a poorly functioning one. Large TFP losses arise as there is amplification between the three sources of financial friction. Without default and heterogeneity in collateral and loan rates, my model would function similarly to a neo-classical model, and there would be a small impact of financial frictions with only a 7% loss in TFP. In the second chapter, "Impact of Entry Costs on Aggregate Productivity: Financial Development Matters", I revisit the question: what is the impact of entry costs on cross-country differences in output and total factor productivity (TFP)? I argue that for the countries with low levels of financial development, the answer is the conventional one in the literature, that higher entry costs cause misallocation of productive factors and lower TFP. However, for countries with reasonably high levels of financial development, the conventional answer does not hold. Motivated by observations on cross-country data, I propose a new theory on the impact of entry costs on TFP. In my mechanism, two competing forces affect TFP when entry cost changes: A wealth-based selection force and a productivity-based selection force. This results in TFP being a hump-shaped function of entry costs. That is, entry costs are not inherently bad for TFP if their target is to deter low productivity individuals from starting businesses. I develop an analytically tractable model of firm dynamics with entry barriers and financial frictions and derive the sufficient conditions for the impact of entry cost on TFP in both wealth- and productivity-based selection phases. In the third chapter, "Firm Entry and Exit in Continuous Time", I develop and analyze a model of firms' entry and exit in a continuous-time setting. I build my analysis based on Hopenhayn (1992) firm dynamics framework and use the continuous-time structure to solve the model. Solving the model in continuous time brings in many advantages, such as lower computational cost and the model's tractability. However, there are some challenges too. One of the major challenges is to have entry cost in the model, i.e., to obtain a Hamilton-Jacobi-Bellman equation that incorporates the entry cost. I use a form of exit cost as the future value of the entry cost to avoid this problem. To do so, I have to keep track of the firms' age distribution in addition to the distribution of the shocks, which makes my model richer than Hopenhayn's (1992). To solve for the joint stationary distribution of the firms, I introduce a simple process for aging and obtain the Kolmogorov forward equation using the age and shock processes. Another methodological contribution is to introduce a way to deal with the Kolmogorov equation in two states with discontinuity and combine them into one equation that governs the state of the economy. The results obtained in this chapter are in line with those reported in Hopenhayn (1992). However, the methods, tools, and the way of approaching the model differs depending on whether I solve the model in discrete or continuous time. The tools and procedures developed in this chapter can easily be extended to other optimal stopping time problems.