Book Description

My dissertation is centered on economic heterogeneity endogenously derived from market imperfections or changes in technology. By introducing specific assumptions that capture a market imperfection or a change in technology, I study how the economic realities can affect resource distributions and aggregate outcomes in an equilibrium. Chapter 1 studies the economic impacts of business groups by focusing on their pyramidal ownership structure given capital market imperfections. An entrepreneur can alleviate financial frictions by creating a pyramidal business group in which a parent firm offers its subsidiary firm internal equity finance. This endogenous creation of pyramidal business groups can beget asymmetric financial frictions between business-group and stand-alone firms. I build a model to show that these asymmetric financial frictions can have sizable effects on resource allocation. On one hand, the financial advantage of pyramidal business groups can foster productive firms by incorporating subsidiaries. On the other hand, the asymmetrically large amount of external capital controlled by pyramidal business groups can push up the price of capital and hinder the growth of stand-alone firms. The model suggests that pyramidal business groups can improve the factor allocation of an economy with poor investor protection in which external capital markets are underdeveloped, but worsen the factor al- location of an economy with fine investor protection in which excessive capital is used up by unproductive business-group firms. Chapter 2 investigates consequence of declining labor shares in manufacture. I show that a Cobb-Douglas production function can be generated with a technology that substitutes capital for labor and decreases labor shares. A simple two-sector model is used to examine consequences of declining labor shares. The model suggests that a declining labor share in manufacture can be accompanied with an increase in the labor productivity dispersion, a decrease in the labor price, and an increase in the land price. Chapter 3 researches the possibility that changes in the number of households simultaneously purchasing durable goods can create a business cycle. Heterogeneous timings of durable goods purchases are examined as an extensive margin of aggregate consumption. I develop a model in which each household holds money to purchase durable goods and optimizes its purchase timing given adjustment costs. The model shows that a shock common to all households such as a change in the expected inflation rate or government transfers can synchronize durable goods purchases across households. I argue that altering the number of households simultaneously purchasing durable goods can generate a sizable, long- lasting business cycle without the help of sticky prices or shocks to TFP.