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Essays on firms heterogeneity and business cycles

Alati, Andrea (2020) Essays on firms heterogeneity and business cycles. PhD thesis, London School of Economics and Political Science.

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Identification Number: 10.21953/lse.00004247


This thesis consists of three chapters in macroeconomics. They study the effects of business cycles on heterogeneous firms and workers and their consequences for the aggregate economy. The first chapter provides the empirical evidence used to motivate and calibrate the theoretical framework developed in the second chapter, discusses the empirical methodology and provides robustness checks to address its limitations. The paper documents two facts. First, aggregate conditions close to the listing year negatively affect firm-level markups. Second, these effects are long-lasting but not permanent. The second chapter explores the role of aggregate uctuations as a persistent determinant of heterogeneity in firm-level markups. Informed by firm-level estimates of markups, the paper builds a general equilibrium model that features heterogeneous product markets, customer base accumulation, and firm dynamics. In the model, firms' demands are constrained by the size of their customer bases. Firms can accumulate customers using two complementary channels: i) increasing sales by lowering prices and ii) making direct investments in customer acquisition. As the value of operating in each product market fluctuates endogenously with business cycles, aggregate conditions generate a selection of the product market composition of the cohorts of active firms that induces time-varying heterogeneity in their cross-section. This heterogeneity is persistent and significantly affects the transmission of aggregate shocks to the economy and the co-movements of aggregate markups with business cycles. The third chapter develops a structural model of the labor market that features both worker and firm heterogeneity and where workers accumulate human capital and search on the job. The paper analyzes the optimal provision of insurance within the firm through an optimal dynamic contract that, paired with limited liability on the firm side, implies downward wage rigidity. In this framework, insurance incentives and contractual rigidities are crucial in determining the pattern of job matches and separations along the business cycle. In particular, we show that aggregate fluctuations can alter the sorting between workers and firms by affecting workers' search strategies and, as a consequence, distort their human capital accumulation.

Item Type: Thesis (PhD)
Additional Information: © 2020 Andrea Alati
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor
Sets: Departments > Economics
Supervisor: Den Haan, Wouter J.

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