The impact of firm heterogeneity in aggregated productivity: Firm entry, financial selection, and capital misallocation

Aggregated productivity is the primary source of long-run economic growth. Therefore, understanding the nature of productivity accumulation is crucial to promoting welfare and development across nations. Recent literature has turned to the micro-foundation of aggregated productivity by studying the role of firms and entrepreneurs in shaping this process, which is the focus of my dissertation. This dissertation consists of three chapters, each of which investigates how heterogeneous firms\u27 decision making determines aggregated productivity. The first chapter studies the role of the financial system in selecting and developing the most promising business plans. In particular, more developed financial sectors are able to better allocate resources and foster cohorts of firms that are more productive. This chapter shows that considering firm heterogeneity is fundamental when studying the effects of financial development in long-run growth. In fact, the financial system determines not only the size of a new cohort of firms but also the productivity of the new entrants The second chapter enriches the former model by studying the effects of financial crises in the long-run level of aggregated productivity. The main mechanism of the first chapter is embedded into a standard stochastic small open economy model, commonly used to study international financial crises. The model suggests that during crises, smaller cohorts of firms arise, but the average contribution of those cohorts to aggregated productivity should be higher than during normal times. This prediction is verified using firm level data from Chile spanning the period of crisis triggered by the Russian sovereign default of 1998. The calibrated model suggests that heterogeneity is crucial when assessing the long-run impact of financial crises in aggregated productivity. The third chapter focuses on the allocation of capital between heterogeneous firms. Firms in the United States have access to unequal tax benefits tied to physical capital and firms that lobby for taxation issues enjoy larger benefits than the rest. A heterogeneous firm dynamics model with endogenous lobbying decisions is developed and calibrated to firm level data. Although only a small fraction of firms lobby, the effect on aggregated productivity is sizeable