Finance, investment and structural change

How have advanced economies developed over the last few decades? Some common trends are clear even to the casual observer: a move away from manufacturing and towards services; an increasing reliance on intangible capital, such as intellectual property or organisational capital; and an increase in the size and importance of the financial sector. This thesis asks whether the first of these phenomena can be partly explained by the second and third. Investment in intangible capital is one kind of irreversible investment: such capital can only be resold at a discount to its purchase price, if it can be resold at all. Chapter 1 develops a partial equilibrium model of an individual firm's optimal investment programme across its life cycle, when investment is partially irreversible. This model is consistent with many stylised facts found in the empirical literature: young firms are reliant on external financing to grow, but eventually reach maturity and are self-financing, while investment irreversibility is positively associated with aggregate corporate savings and negatively associated with aggregate corporate borrowing. Firms with these characteristics are embedded in a two-sector general equilibrium model in Chapter 2. The degree of investment irreversibility is found to affect the relative sizes of the two sectors -which we label `manufacturing' and `services' - but the direction of this effect depends on consumer preferences. Government subsidies to capital liquidation are found often to be welfare-enhancing, but these subsidies increase the size of the manufacturing sector relative to the services sector, so may be misinterpreted as a deliberate boost to manufacturing. In Chapter 3, the relationship between finance and structural change is examined both theoretically and empirically. A general equilibrium model is developed, predicting that financial development will accelerate structural change towards services and away from manufacturing. This prediction is supported by empirical evidence that structural change accelerated following bank branching deregulation in the United States, which happened in a staggered fashion from the 1970s to the 1990s, where the principal estimation strategy is a pooled ridge augmented synthetic controls study