Essays on firm dynamics

There is a growing interest among macroeconomists in incorporating explicit heterogeneity into macroeconomic models, allowing to bring in micro data to discipline them. In this way, we can understand how shocks or policies impact differently these heterogeneous agents and their macroeconomic implications, which sometimes might differ from those obtained using a representative agent model. My dissertation consists of two main chapters that attempt to understand the impact of changes in the economic environment, with a special focus on taxes, on heterogeneous firms’ investment and growth decision, the firm size distribution of firms, and ultimately their impact on macroeconomic aggregates. In the first chapter, ‘Taxation and the Life Cycle of Firms ’, co-authored with Andrés Erosa, we extend the Hopenhayn and Rogerson (1993) framework to understand how different forms of taxing capital income affect firms’ investment and financial policies over their life cycle. Relative to dividends and capital gains taxation, corporate income taxation slows down firm growth over the life cycle by reducing after-tax profits available for reinvesting. It also diminishes entry by negatively affecting the value of entrants relative to that of incumbent firms. After a tax reform eliminating the corporate income tax in a revenue neutral way, output and capital increase by 12% and 32%. The large response of firm entry is crucial for these results. In the second chapter, ‘Macroeconomics, Firms Dynamics and IPOs’, I study how changes in the economic environment witnessed in the US in the last decades regarding taxes, access to credit and idiosyncratic productivity shock process impact firms’ choices. I argue these changes might impact differently privately held and publicly traded firms, having therefore implications for the endogenous decision to become public (IPO) and their macroeconomic consequences. I extend a model of firm dynamics with private and publicly traded firms, where I explicitly model the going public decision. Firms are born private, grow by reinvesting profits and/or borrowing, and can eventually do an IPO and become public. Being public, firms can access to costly equity financing, but have to pay an ongoing cost of operation. I calibrate the model to the US, and study how the observed changes in the last decades of taxes, equity issuance costs, the costs of being public, access to credit and idiosyncratic shock process impact a) changes in selection into public (IPO); b) firms’ policies; and c) macroeconomic aggregates. I find the decrease in corporate and dividend taxes in the 1990s contributes to the increase in share of public firms, and the changes in firms’ policies observed in the data, having a larger impact than changes in equity issuance costs. An increase in the cost of being public is at odds with the changes in selection into public and firms’ policies observed in the data during the 2000s, and so is an increase access to credit. Changes in the idiosyncratic shock process can reconcile some of the trends in behaviour and selection of publicly traded firms, and have important macroeconomic implications.Programa de Doctorado en Economía por la Universidad Carlos III de MadridPresidente: Andrea Caggese ; Secretario: Emircan Yurdagul ; Vocal: Josep Pijoan Ma