UCLA

I study the determinants of the firms’ investment decisions.First, I quantify how building transport infrastructure affects investments. Whereas there is growing evidence that new infrastructure reduces trade costs, we lack a rigorous empirical understanding on how it impacts investments. To make progress, I leverage the U.S. crude oil industry. I specify a structural model of discrete investments centered around the producers’ dynamic trade-off between current revenues and delaying investments to wait for additional transport infrastructure. I bring this model to a comprehensive dataset that allows me to match the drilling activity of oil producers with the construction of pipelines across space and over time. I estimate that pipelines reduce the producers’ transportation costs by 15%, increasing the amount of new oil wells by 28%. In sum, I find that firms substantially increase investments in response to the new transport infrastructure. Then, I study how the firms’ ownership structure affects investments. Vertical integration could increase investments for the integrating firm and reduce investments for its rivals. I measure the investment outcomes of eight vertical mergers in the US motion picture industry using 1997-2019 movie-level and companies’ ownership data. Using a difference-in-difference research design, I estimate that vertical mergers increase investments for the integrating counterpart by 73.5%, while reducing investments for its rivals by 47%. Then I specify a within-firm model of resource allocation in order to separate the role of credit constraints and industry-specific technology from the change in the internalized return from investments. The results support the property rights theory.