My thesis consists of three chapters on economic development.

Chapter 1:

The research on the catch-up process of a developing economy focuses on the role of foreign technology transfer and the importance of domestic technology transfer lacks study. We study the trends of expenditures on innovation, foreign technology transfer, and domestic technology transfer. During the transition period of China from 1998 to 2007, the expenditures on innovation and domestic technology transfer of Chinese firms in the manufacturing sector grow two times faster than the expenditure on foreign technology transfer. Furthermore, the estimated productivity at the firm level shows that rapid productivity growth is accompanied by decreasing productivity dispersion. The productivity dispersion has decreased by 39% in the same period. I document several empirical facts at the level of the industry. First, innovation is positively correlated with relative productivity. Second, the expenditure on domestic technology transfer increases in relative productivity and the growth rate of relative productivity is positively correlated to the expenditure on domestic technology transfer.

Chapter 2:

I develop a theory in which firms endogenously choose one of three mutually exclusive methods to increase productivity: innovation, foreign technology transfer, and domestic technology transfer. Domestic technology transfer offers firms with low productivity a chance to become highly productive by meeting highly productive domestic peers. Domestic technology transfer leads to faster growth of productivity and a greater number of firms with high productivity. The productivity growth in China makes more Chinese firms choose to innovate or learn from domestic peers in a dynamic environment. Thus, the expenditures on innovation and domestic technology transfer increase faster. In our model, firms with low productivity adopt foreign or domestic technology and grow faster than highly productive firms. This results in the decreasing productivity observed in the data.

We use the simulated method of moments to estimate the key parameter values of the transition model. Our model fits data well. After checking the model fit, we conduct two experiments to answer the two questions mentioned at the beginning of our talk. In one experiment, domestic technology transfer is not allowed, and I find that domestic technology transfer contributes 30% of productivity growth and 31% of relative innovation expenditure growth. In the other experiment, we improve the domestic intellectual property and the policy changes significantly reduce both productivity growth and expenditure on innovation.

Chapter 3:

Our economic geography model features cross-country productivity, human capital, amenity and population differences, international trade, migration cost, and heterogeneous working and entrepreneurial skills. We compare welfare under baseline parameterization with a migration autarky counterfactual and the welfare gains of the US native residents from migration reform. The gains from migration are substantial, as high as trade gains, and natives in countries that received a lot of migration are much better off, at about 5% to 15%. Both the native entrepreneurs and workers benefit from migration while the entrepreneurs tend to gain twice as large as the workers. The welfare of the US native entrepreneurs and workers can increase by 5.1% and 1.6% by optimizing migration frictions and the population of the US increases by 14.7% under optimization.

In these essays, I examine (i) international finance and its effects on the economies (ii) immigration and its effects on labor markets. The first chapter explores whether the intervention of a lender of last resort (LLR) with seniority improves the welfare of the countries that are solvent but illiquid. In a model with information asymmetries and incomplete contracts I find that depending on the initial parameters, LLR intervention may or may not help these countries in overcoming this problem since an LLR intervention decision with seniority incorporates a trade-off between higher levels of intervention and lower liquidation. Results of my simulation analysis show that there exists some conditions under which LLR intervention creates lower level of welfare and is not preferable. On the other hand, if the conditions are such that LLR intervention is preferable, given some restrictions, I find that LLR intervention should be conducted without the seniority requirement. Second and third chapters analyze the effect of immigration on welfare through endogenous technological choice of firms. In the second chapter, I empirically test whether immigration of different types of labor (skilled vs. unskilled) affects technology choice of firms differently. Specifically, I test whether firms change their technology in such a way that they will increase the productivity of the labor type that has become more abundant. In order to achieve this, I use census data between years 1970 and 2006 and use instrumental variable technique. Regression results show that high skilled immigration has a strong and positive association with the high-skilled intensive production technology choice of firms while low skilled immigration has a strong negative association with the high-skilled intensive production techniques. In other words, there is a strong association between immigration and endogenous technological choice of firms. In the third chapter, I analyze how immigration affects the long-run welfare of immigration through endogenous choice of firms. Existing theoretical models predict that immigration would depress the wages. However, empirical literature finds that immigration effect on wages is either positive or insignificant. In order to match the theory with these empirical findings, I embed endogenous technological change in a model similar to Auerbauch and Kotlikoff (1987). The results show that the standard model underestimates the effect of immigration to native skilled workers by 95% while it overestimates the effect on native unskilled workers by 31%. Comparing the fiscal effects of immigration in terms of burden of an immigrant through net present discount value (NPV) calculations existing models overestimate NPV of an additional low skilled immigrant approximately by 35% and underestimate the value of an additional high skilled immigrant by 15%

This dissertation comprises three chapters that explore the role housing plays in household decision-making and its macroeconomic implications, aiming to improve our understanding of how macroeconomic shocks are amplified or muted due to financial frictions and the special properties of housing through the household side of the economy.

The first chapter investigates how households adjust their car spending in response to a housing wealth shock. Utilizing detailed Swedish administrative data, my co-authors and I study the economic consequences of the unexpected decision to continue operating Bromma Airport in Stockholm, Sweden, in 2007. The airport's continuation changed perceptions of housing values in areas exposed to its negative externalities, such as noise and accident risk, causing persistent and heterogeneous changes in housing wealth across households. By using transaction data on homes across differently exposed neighborhoods, we estimated household-level housing wealth losses. We also observe car purchases for all households and can match car purchases to housing wealth losses and other household characteristics which allows us to quantify the effect on car spending in a difference-in-difference setting. The key finding is that households exhibit a muted response in car purchases compared to prior studies. Using loan-level data, we show that the effect is concentrated among homeowners who rely more on mortgage borrowing to finance car purchases; as home prices unexpectedly change, their borrowing ability is impacted, suggesting a significant role for the collateral channel. By exploiting other dimensions of household heterogeneity, we also conclude that the pure wealth effect is weak.

The second chapter addresses the puzzle of low migration rates from areas experiencing economic decline. Focusing on the labor-market area around Stavanger, Norway, following the 2014 global oil price drop, I empirically document that diminishing home values are associated with homeowners reducing their probability to leave, while renters and homeowners with the least housing wealth exhibit an increase in their leaving probabilities. On net, the out-migration response is economically insignificant while the in-migration response exhibits a strong reduction—the net-migration falls because people stop moving to Stavanger. A life-cycle model with location, housing, and saving decisions explains these results: The reduction in home prices decreases the affordability of housing in potential destinations, thus making migration less attractive—a "housing wealth effect." This finding challenges the prevailing notion that cheaper local housing encourages workers to stay—i.e., benefits stayers—and instead suggests that falling home values act as a barrier to mobility. From a general equilibrium perspective, prices have to fall to clear the housing market. As prices fall, it becomes less attractive for homeowners to move. Potential immigrants are deterred by the fall in potential earnings, and current homeowners end up holding the stock of housing. While effective policy transfers welfare from those impacted by shocks, a policy experiment with moving vouchers shows that the beneficiaries are largely renters, who are already compensated by cheaper rents but still act as if they face lower moving costs.

The third chapter complements the analysis of the first, using the same empirical setting as Chapter 2 but narrowing the sample to government workers who did not suffer differently from the oil shock as a function of their location. However, changes in home prices accompanying the oil shock differed greatly depending on the location's exposure to the petroleum sector. Using Norwegian administrative data matched to high-frequency digital payment data, we document the dynamic response of expenditures by various goods and services as functions of lost housing wealth at the household level. The analysis provides a more detailed understanding of housing wealth shocks' spending dynamics and heterogeneity than previous work. We find that overall spending is affected less than in previous work, with a marginal propensity for expenditures close to 0.02 kroner per krone housing wealth change. Vehicles and furnishings—durable goods often financed using credit and whose purchases can be postponed—respond more strongly, while food and beverages do not change when contrasting between government workers in Stavanger versus the rest of Norway. We also find that more indebted households and those with less liquid assets respond about twice as strongly than the average. Our findings indicate that the potential spillovers of reduced consumption due to home price shocks can be limited due to the nature of goods more affected, and that the distribution of debt in the economy matters for the aggregate effect.

Collectively, these essays contribute to the fields of household finance and macroeconomics by leveraging comprehensive Scandinavian administrative data and quasi-experiments, offering insights that add to previous studies. The findings underscore the complexity of housing wealth effects on consumption and migration, with policy implications for addressing economic decline and household financial stability.

In these essays, I examine the role of allocating human capital and labor in an economy. The first chapter documents occupational inheritance–interpreted as children inheriting their parents' occupations–in China, India, and the US. I argue that the prevalence of occupational inheritance in China and India is largely due to two categories of impediments: (1) labor market frictions, e.g., parents' social networks and household registration, which ties rural families to agriculture in China, and the caste system, which restricts young workers' occupational choices in India, and (2) barriers to acquiring human capital, i.e., it is much easier for the young in the US to accumulate human capital from sources other than senior family members compared with the young in China and India. Based on a new tractable occupational choice model using techniques from Eaton and Kortum (2002), this chapter quantitatively evaluates the aggregate implications of occupational inheritance. Counterfactual experiments suggest that if the impediments mentioned above could be reduced to the US level, labor productivity would grow 57 to 73% in China and over fourfold in India. In addition, China has realized 60 to 74% of this growth potential from the 1980s to 2009.

The second chapter builds on three empirical facts in the US labor market: from 1980 to 2005, there was (1) about 30% growth in low-skill service jobs, (2) about 9% increase in female labor force participation, and (3) almost constant average home production hours conditional on employment status and gender. I propose a hypothesis that the increase in female labor force participation decreases home production and leads households to purchase substitutable goods from the market. A simple accounting framework produces a benchmark quantitative exercise showing that this theory can explain about 50% of the increase in low-skill service jobs.

In the third chapter, I develop a theory of efficient innovation. Individuals are heterogeneous in innovation ability, and the allocation of innovative agents into process innovation and product innovation determines the level of innovation efficiency and output growth rate. I identify several sources of inefficiency of the competitive economy, notably the frictions in the innovator market.

These essays contribute to the study of labor economics and consumer finance, and fall within the broader category of quantitative macroeconomics. Chapter 1 investigates the trade-off between wage volatility (risk) and wage differentials (return) across industries through the lens of a general equilibrium, incomplete markets, life cycle model which allows for inter-industry mobility. While standard economic reasoning tells us that risk averse workers will demand a premium for exposure to wage volatility, for plausible calibrations of the model, I find that precisely the opposite is true - industries which expose workers to relatively low (high) wage volatility pay relatively high (low) wages. This chapter argues that inter-industry mobility is a quantitatively important insurance channel against labor market risk which is responsible for this counter-intuitive result. Chapters 2 and 3, which are both co-authored by Matthew Nelson Luzzetti, address issues in consumer finance. In Chapter 2, we introduce statistical learning and aggregate uncertainty into an otherwise standard model of consumer default. We show that learning by households and creditors endogenously generates a credit boom during a prolonged economic expansion like the Great Moderation and a severe and protracted credit crunch in response to an economic contraction like the recent financial crisis. This chapter illustrates that learning by households and creditors is an important driver of aggregate debt dynamics. Chapter 3 develops an equilibrium model of consumer default with both long-term collateralized mortgages and short-term unsecured debt. We use this framework to evaluate whether the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 contributed to the severity of the housing crisis by inducing homeowners to default on their mortgage who would otherwise have declared bankruptcy and remained in their home. We find that although this reform significantly increased mortgage default rates upon implementation, it likely had only a minor impact on the severity of the subsequent housing crash if lenders rationally adjusted their mortgage interest rates to account for its impact on the incentives of households to repay their debt.

This dissertation consists of three chapters. This first chapter studies ability sorting between rural and urban regions induced by regional differences in prices and evaluates the importance of this mechanism in explaining the large rural-urban (agriculture-non-agriculture) income gap in developing countries. The second chapter studies how capital deepening might help explain several development facts regarding agriculture when capital-labor substitution is easier in agriculture than in non-agriculture. The third chapter explores resource misallocation in production networks and studies how ignoring them might lead to mismeasured efficiency loss from misallocation.

My thesis consists of three chapters on banking, financial markets, financial frictions and their implications on firm innovation and growth.

Chapter 1:

Much of the research has focused on how financial constraints affect a firm's R&D expenditure, but little has been focused on the type of innovation. Using matched firm-patent panel data of U.S. public firms from 1997 to 2016, Chapter 1 shows that financially constrained firms switch toward internal (improve existing products) from external (develop new product lines) innovation. For an average firm, a one standard deviation decrease in cash-flow ratio leads to a 10-p.p. decrease in the percentage of external innovation. Also, the sensitivity of external innovation to cash flows is higher during the 2007-2009 financial crisis and for firms in sectors dependent on external financing. The empirical findings are robust to various panel regression specifications. Since external and internal innovations generate different quality improvement and growth potential, the interaction between financial constraints and the type of innovation provides a new mechanism by which finance affects firm and economic growth.

Chapter 2:

The firm size-growth relation plays a central role in many economic growth studies. Empirical literature shows that this relation depends on financial market conditions: sometimes small firms grow faster, but growth rates become independent of firm size when frictions are high (Gibrat's law). In contrast to most growth models that assume a fixed size-growth relation, my framework allows it to vary with financial frictions. In the model, firms of different sizes grow by internal (improve existing products) and external (develop new products) R&D, but R&D expenditure is restricted by profits (or cash flows). This setup allows for rich interactions between size-growth relation and compositional change of R&D types in evaluating how financial frictions affect aggregate growth. The model is consistent with the fact that financially constrained firms switch to internal R&D and reduce R&D expenditure. The equilibrium is solved with neural networks. The estimated model suggests a significant drop in growth and welfare after the Great Recession. The importance of size-dependent policies that subsidize small firm R&D more than large firms is also quantified.

Chapter 3 (with TengTeng Xu and Udaibir S. Das):

We analyze how bank profitability impacts financial stability from both theoretical and empirical perspectives. We first develop a theoretical model of the relationship between bank profitability and financial stability by exploring the role of non-interest income and retail-oriented business models. We then conduct panel regression analysis to examine how the level and source of bank profitability affect risks for 431 publicly traded banks (U.S., advanced Europe, and GSIBs) from 2004 to 2017. Results reveal that profitability is negatively associated with both a bank's contribution to systemic risks and its idiosyncratic risks, and an over-reliance on non-interest income, wholesale funding and leverage is associated with higher risks. Low competition is associated with low idiosyncratic risks but high contribution to systemic risk. The paper's findings suggest that policy makers should strive to better understand the source of bank profitability, especially where there is an over-reliance on market-based non-interest income, leverage, and wholesale funding.

The dissertation contributes to our understanding of how multinational firms and financial frictions affect income in developing countries. From a policy perspective, I find that as developing countries open up to multinational firms, financial reforms become increasingly beneficial to national income in the countries. I also find that the joint ventures of foreign multinational firms with state-owned firms, an industrial policy in China, prevent technology spillovers and suppress industrial output. The dissertation consists of three chapters.

Chapter 1: Financial frictions, Multinational Firms, and Income in Developing Countries: Theoretical Analysis

Financial frictions create resource misallocation across heterogeneous production units and reduce national income (GNP) in developing countries. Multinational firms, however, can largely circumvent local financial frictions by borrowing from international sources. In this chapter, I theoretically study whether the presence of multinational firms in developing countries alleviates the adverse impact of financial frictions on national income. I show that in a developing economy that is open to multinational firms, if domestic firms produce a sufficiently large (small) share of output, financial frictions will cause a larger (smaller) decline in national income than in an otherwise identical developing economy that is closed to multinational firms. Such result calls for the quantitative analysis in the next chapter.

Chapter 2: Financial frictions, Multinational Firms, and Income in Developing Countries: Quantitative Analysis

In this chapter, I quantitatively study how the presence of multinational firms in developing countries change the adverse impact of financial frictions on national income. Using a calibrated structural model, I find that when a developing economy is open to multinational firms, a modest financial reform that reduces financial frictions in the developing economy will increase national income by 19%, as opposed to only 11% when the economy is closed to multinational firms. Such result indicates that financial frictions become increasingly costly and financial reforms become increasingly beneficial to national income in developing countries as they open up to multinational production.

Chapter 3, Joint Ventures and Technology Spillovers in China

Chinese government actively promotes joint ventures of foreign multinational firms with state-owned firms. In this chapter, I study the effects of the joint ventures in promoting technology spillovers. Using firm-level data in China, I find that higher joint venture presence in a sector leads to higher productivity of firms in the upstream of that sector, but lower productivity of firms in the downstream of that sector. A quantitative analysis suggests that the later force will dominate, and joint ventures will on aggregate prevent technology spillovers and cause a significant decline in total industrial output in China.

This series of essays studies the observed fluctuations in the aggregate economy and the factors behind. I first examine the cyclical behaviors of the aggregate productivity shocks, as measured by the aggregate Solow residual and how it relates to the technology adoption decision done by individual firms. Then I divert my attention to the labor market, and enquire into (i) why workers with different skills show such significant differences as observed in the U.S. in terms of their unemployment rates and wages; and (ii) what the so-called labor wedge might reflect.

The first chapter of my dissertation formalizes Schumpeter's idea that the firm level technological changes are what cause changes in the aggregate Solow residual. The analysis starts with a characterization about how new firms make their technology adoption decision, taking into account both the average productivity of the candidate technology and the risk associated with its adoption. Then through the creative destruction process, these newly adopted technologies gradually prevail in the market, and eventually manifest themselves in the aggregate Solow residual. The quantitative experiments confirm that the Schumpeterian story told in this chapter is able to amplify the traditional aggregate productivity shock, as well as to transform other shocks to the economy into variations in the Solow residual, and thus generating significant business cycle fluctuations. The model also has a few reasonable firm-level implications.

The second chapter develops a framework for the study of the labor market dynamics when workers differ in their production efficiency, which I call skills in the chapter, and when there are search frictions. Compared to the standard business cycle model with frictional labor market, skill heterogeneity in my model creates dispersion in the match surpluses between the workers and the firms, and thus necessitates a screening process that results in the termination of the unprofitable matches in equilibrium. This endogenous separation mechanism disproportionately influences the employment status of the less-skilled workers and not only exposes them to larger layoff risks, but also inflicts on them greater difficulties in terms of reestablishing their employment relationship with the firms. Quantitatively, the model has cross-sectional implications for the unemployment rates and the wages that are consistent with the observed differences across skill groups in the U.S. labor market.

The last chapter carefully studies the hypothesis that the empirical labor wedge as defined by Robert Shimer may reflect the existence of a household production sector that is largely uncounted by the standard macroeconomic framework. By enriching an otherwise standard real business cycle model with a household production sector, I find that if the hours worked at home and the utility obtained from the home-produced goods are not included in the calculation, the model generates a wedge between the marginal product of labor (MPL) and the household's marginal rate of substitution between consumption and leisure (MRS) that assembles the empirical labor wedge. With reasonable parameter values, the quantitative properties of the model-predicted labor wedge also match those of their empirical counterpart.

This dissertation studies the interaction between private consumption smoothing mechanisms and labor markets. Chapter 1 studies the growth in credit card access among the unemployed over the last 40 years and how this credit growth has impacted labor markets. I begin by developing a general equilibrium business cycle model with search in both the labor market and in the credit market. Calibrating to the observed path of credit between 1974 and 2012, I find that growth in credit card access can lead to deeper and longer recessions as well as moderately slower recoveries. Chapter 2, which is co-authored with Lee E. Ohanian, looks at the impact of foreclosure protection on unemployment during the 2007-2009 financial crisis. Through a purely positive lens, we study and document the growing trend of mortgagors who skip mortgage payments as an extra source of ``informal'' unemployment insurance during the 2007 recession and the subsequent recovery. In a dynamic model, we capture this behavior by treating both delinquency and foreclosure not as one period events, but rather as protracted and potentially reversible episodes that influence job search behavior and wage acceptance decisions. After calibrating, we find that the observed foreclosure delays increase the unemployment rate by an additional 1/3%-3/4%. And finally, Chapter 3, which is co-authored with Lee E. Ohanian, Kris Gerardi, and Paul Willen, looks at the empirical determinants of default and provides a new suggestive measure of strategic default. In sharp contrast to prior studies that proxy for individual unemployment status using regional unemployment rates, we find that individual unemployment is the strongest predictor of default. We also find that only 13.9% of defaulters have both negative equity and enough liquid or illiquid assets to make 1 month's mortgage payment. This suggests that ``ruthless,'' or ``strategic'' default during the 2007-2009 recession is relatively rare, and suggests that policies designed to promote employment, such as payroll tax cuts, are most likely to stem defaults in the long run rather than policies that temporarily modify mortgages.