UCLA

This dissertation contributes toward our understanding of how technological changes in recent decades affect firm behaviors and various aspect of the aggregate economy, including changes in market concentration, productivity, labor share and credit allocation.

In Chapter 1, “Customer Acquisition, Rising Concentration and US Productivity Dynamics”, I document that the cost of marketing and advertising has declined enormously in recent decades due to the advance of digital technologies. This chapter then studies the macroeconomic consequences of lower marketing cost, and finds that it is a critical driving force of several striking macroeconomic trends, including rising market concentration and productivity growth slowdown since the 1990s. I develop an endogenous growth model with product market search frictions. Firms invest in innovation and marketing to build customer base, which is a long-term asset. Then I exogenously feed in the observed large drop of marketing cost into the quantitative model and find that it accounts for 83\% of the rise in market concentration, measured by the largest firm’s market share. Cheaper marketing generates a positive level effect and a negative growth effect on productivity. These two effects together explain around 1/3 of the decline in productivity growth rate and successfully capture its hump-shaped pattern over time. Finally, I conduct a welfare analysis and find that firms tend to over-invest in marketing compared to the socially optimal allocation, which implies that welfare can be improved by a marketing tax.

In Chapter 2, “Revisiting Capital-Skill Complementarity, Inequality, and Labor Share”, jointly written with Lee Ohanian and Musa Orak, we analyze the quantitative contribution of capital-skill complementarity in accounting for rising wage inequality, as in Krusell, Ohanian, Rios-Rull, and Violante (KORV, 2000). We study how well the KORV framework accounts for more recent data, including the large changes in labor’s share of income that occurred after the KORV estimation period ended. We also study how using information and communications technology (ICT) capital as the complementary capital stock affects the model’s implications for inequality and overall model fit. We find significant evidence for continued capital-skill complementarity across all model permutations we analyze. Despite nearly 30 years of additional data, we find very little change to the original KORV estimated substitution elasticity estimates when the total stock of capital equipment is used as the complementary capital stock. We find much more capital-skill complementarity when ICT capital is used. The KORV framework continues to closely account for rising wage inequality through 2019, though it misses the three-percentage point decline in labor’s share of income that has occurred since 2000.

In Chapter 3, “Private Information, Adverse Selection and Small Business Financing”, I develop a competitive search model with asymmetric information and search frictions in bank-borrower relationship. The development of data-driven technologies increases the enforceability of lenders when the borrowers fail to meet the standard repayment requirement. In a credit market where borrowers can easily escape debt obligations, banks tend to use market tightness for screening and post too few contracts for safe borrowers to deter imitation from riskier borrowers. When lender enforceability rises, however, the required repayment becomes a better screening device. To stand out from the risky ones, the safe borrowers accept the contract in which they are over-charged and over-offered the loans.