Firm Heterogeneity in Macroeconomics

Macroeconomic models are often estimated with aggregate data, aligning the aggregated behavior of firms and households in models to the data. However, using aggregate data alone can overlook important details of firm behavior that are crucial for understanding issues in macroeconomics. In this dissertation, I use data on firms at the micro-level to more accurately capture firms behavior and their interactions with one another. This approach is applied to answer questions that relate to the monetary policy transmission mechanism, economic growth from new entrants and welfare gains from new technology.A substantial literature exists which suggests that imperfect information across firms is capable of generating large monetary non-neutralities. In Chapter One, the level of imperfect information is taken from micro-data and used to discipline a standard menu cost model augmented with information frictions. In the model, imperfect information has a negligible effect and real responses to a monetary shock are small and transient in contrast to the bulk of the imperfect information literature. The selection effect dominates the effects of imperfect information as the level of dispersion in inflation expectations in the data is tiny. This result still holds even when the level of dispersion is set to that of the maximal observed levels of dispersion.Chapter Two presents data that suggests new entering establishments compete for customers, rather than inputs in order to grow. Consistent with the data, I present a model where customers satisfice in forming relationships with establishments in the presence of search frictions. The extent of these search frictions is a new margin that affects selection and allocative efficiency. As search becomes less random and more directed, customers are less willing to satisfice, improving allocative efficiency and inducing exit of slower growing firms. When search frictions in product markets are increased to match establishment dynamics in Chile, output falls by roughly 14 per cent relative to the model calibrated to the US, reflecting decreased allocative efficiency.Chapter Three studies the impact of online retail on aggregate welfare. I develop a new measure of store level retail productivity and with a spatial model, calculate each store's equilibrium response to increased competitive pressure from online retailers. From counterfactual exercises mimicking improvements in shipping and increased internet access, I estimate that improvements in online retail increased aggregate welfare from retail activities by 13.4 per cent. Roughly two-thirds of the increase can be attributed to welfare improvements holding fixed market shares, with the remainder due to reallocation. Surprisingly, 8.2 percent of firms actually benefit as they absorb market share from closed stores. Finally, I estimate that the proposed Marketplace Fairness Act would claw back roughly one-third of sales that would otherwise have gone to online retailers between 2007-12