ESSAYS ON INDUSTRIAL ORGANIZATION AND FIRM DYNAMICS

211 pagesThis dissertation consists of three essays in the areas of Industrial Organization and Firm Dynamics and Trade, examining the interaction between firms’ decision-making and government policies in determining market outcomes and the welfare consequences.The first chapter studies how upstream market concentration and demand risk affect downstream firms’ outsourcing decisions. Firms’ boundary decisions are one of the most fundamental issues in economics. I focus on the volatile automobile industry and study how firms can use outsourcing to insure themselves against the demand risk. I formulate a structural model in which outsourcing allows the downstream firms to hedge the uncertain in-house production cost and upstream firms exploit downstream’s insurance motive by exerting market power. I estimate the model using data on the vehicle manufacturers and upstream transmission firms in the automobile industry. In the counterfactual analysis, I evaluate the potential impact of the United States-Mexico-Canada Agreement. When the upstream market is more concentrated due to the protection of the local firms, upstream’s price response to a negative shock further increases by 68%. An increase in upstream market power attenuates upstream’s role of insurance and amplifies the impact of economic downturns on consumer welfare and manufacturers’ profit by 65%. My paper highlights a previously overlooked welfare loss channel of market power, especially in industries heavily affected by the business cycles. In the second chapter, I analyze the impact of trade policies on firm dynamics and the labor market. I construct a demand system with the production function to purge out the price effect in productivity measures based on sales data. It allows me to separate the firm-side physical productivity gain from the demand-side impact of trade liberalization. I use my new physical productivity measure to analyze the effect of the processing trade policies prevalent in developing countries. Required by the policy, firms import duty-free intermediate input from abroad but are forced to reexport their final products. Though firms with high productivity enter the export market, I find firms with productivity lower than non-exporters become pure processing trade firms and export as well. In addition, their productivity gains from the input tariff reduction and exporting are much smaller compared with the other exporting firms. In the third chapter, my coauthor and I study the geographic concentration of entrants and capitalists in the US. We first document that VC investment is elastic to local vintage capital, and we propose that local vintage capital supply is an essential determinant of this spatial concentration and co-location decision. We develop a model by linking the motives of co-locating by entrants and capitalists via a core feature of vintage capital reallocation toward young firms mediated by venture capital. Since a vintage capital market with abundant supply can lower the capital cost and thus increase the profits, VC investments are attracted due to higher expected returns. This, in turn, encourages entrepreneurship and leads to a selection-induced agglomeration effect. A larger city intensifies such allocative forces and thus amplifies the agglomeration effect, which ultimately makes the city further attractive to VC investment relative to others