Essays in Firm Heterogeneity and Productivity

Abstract

"Essays on Firm Heterogeneity and Productivity" explores the connections between firm heterogeneity, financial markets, firms' outcomes, and economic aggregates. The thesis aims to further understand the linkages between investment decisions of heterogeneous firms, the financial intermediaries' lending behavior, and the economy's aggregate output.The thesis consists of three essays organized in chapters. Chapter I, "Firm heterogeneity and misallocation" investigates the aggregate consequences of asymmetric information about firms' expected returns in financial markets. The main result is that if lenders cannot distinguish between firms with high and low potential returns, they offer them more similar funding conditions than otherwise, generating inefficient firm sizes and output losses. Chapter II, "Liability protection and firm growth," investigates the role of limited liability as insurance for entrepreneurs. The main result of the essay is that limited liability fosters entrepreneurial activity because it incentivizes risk-taking in two dimensions, firm size and the adoption of riskier and more profitable technologies. Quantitatively, this accounts for sizable output gains. Chapter III, "Aggregate effects of wealth redistribution on technology adoption and productivity," shows how carefully targeted wealth redistribution can generate sizable output gains. The key is to redistribute towards entrepreneurs that might adopt more profitable technologies if they were more affluent. The primary mechanism is that increasing the wealth of entrepreneurs makes them more likely to run risks, adopt more profitable technologies and set up larger firms.