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Essays on Financial Crises and Misallocation

  • Author(s): Zaourak, Gabriel Roberto
  • Advisor(s): Burstein, Ariel T;
  • Ohanian, Lee
  • et al.

The following essays contribute towards our understanding of nancial crises and development

dynamics. The dissertation is composed of three chapters.

Chapter one---Lobbying for Capital Tax Benefits and Misallocation of Resources During Credit Crunches

Corporations often have strong incentives to exert influence on the tax code and obtain additional tax benefits through lobbying. For the U.S. 2007-2009 financial crisis, I show that lobbying activity intensified, driven by large firms in sectors that depend more on external finance. Using a heterogeneous agent model with financial frictions and endogenous lobbying, I study the aggregate consequences of this rise in lobbying activity. When calibrated to U.S. micro data, the model generates an increase in lobbying that matches both the magnitude and the cross-sector and within-sector variation observed in the data. I find that lobbying for capital tax benefits, together with financial frictions, can account for 80 % of the decline in output and almost all the drop in total factor productivity observed during the crisis for the non-financial corporate sector. Relative to an economy without lobbying, this mechanism increases the dispersion in the marginal product of capital and amplifies the credit shock, leading to a one-third larger decline in output. I also study the long run effects of lobbying. Restricting lobbying implies welfare gains of 0.3 % after considering the transitional dynamics to the new steady state.

Chapter 2---Market Power and Aggregate Efficiency in Financial Crises

In joint work with Fernando Giuliano, we document that during financial crises in emerging economies, large firms become relatively larger and small firms become relatively smaller. What are the aggregate consequences of the resulting increase in market concentration? We answer this question quantitatively with a model where firms are able to exploit their market power through heterogeneous markups. Financial frictions take the form of a collateral constraint that gets tighter during a financial crisis. We discipline the model using detailed plant-level microdata for Colombia, and analyze the transition dynamics of an economy as it adjust to a credit crunch. We find that when firms are able to adjust their markups in response to a credit shock, the response of aggregate output and productivity is dampened. Variable markups act as a buffer that partially offsets the misallocation triggered by a financial crisis. This follows from adjustments at both the intensive and extensive margins.

Chapter 3---Innovation Effort in a Model of Financial Frictions: The Case of Reforms

The last chapter is part of an ongoing project to explore the role of innovation as a key ingredient to capture development dynamics of the growth miracles in the East of Asia. During the second half of the last century those economies carried out a rapid dismantling of distortions affecting the size of firms that led to a reallocation of resources. This, together with a slow financial liberalization, created the conditions for sustained increase in per capital income, an increase of investment rates and improvements in aggregate productivity. Using an environment with financial frictions and resource misallocation in a pre-reform economy, Buera and Shin (2013) were able to capture the first two facts. However, the model delivers counterfactual dynamics for aggregate productivity due to the assumption of exogenous firm level productivity. Extending their framework to allow firms to improve their productivity through innovation, I explore the implications of the interaction between financial frictions, resource misallocation and endogenous innovation.

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