Lei Ye

Date of Award

Spring 5-15-2023

Author's School

Graduate School of Arts and Sciences

Author's Department

Economics

Degree Name

Doctor of Philosophy (PhD)

Degree Type

Dissertation

Abstract

The purpose of this dissertation is to study the causal factors that contribute to the reallocation of economic activity in the product, financial and labor market, and to analyze the implications of these phenomena on the aggregate economic performance.

The dissertation consists of three chapters. The first chapter, "Bank Concentration, Product Market Competition and Firm Dynamics", investigates the concentration trend in the U.S. banking industry since the implementation of the Riegle-Neal Act in 1994 and its impact on product market competition, firm dynamics and aggregate economic performance. Empirically, I document that bank concentration is associated with less competition in product markets. It demotivates competition from new entrants on the extensive margin, and also strengthens market power of large incumbents at the cost of small ones on the intensive margin. I rationalize the empirical facts with an endogenous growth model that features imperfect bank competition, endogenous product market structure and interactions between banks and heterogeneous product market firms. Small firms are more reliant on bank financing than large firms, thus they are more heavily impacted by an interest rate spread increase that reflects the rise of bank market power in the bank concentration process. Changes in strategic competition among product market firms in response to the increased financing cost amplify the market reallocation towards large firms. Firm entry is deterred following the market structure change, further decreasing competition in product markets. In a calibration of the model to infer changes of the U.S. economy between the 1990s and the 2000s, bank concentration accounts for about 60 percent of the product market concentration, 20 percent of the entry and exit decline, and 60 percent of the enlarged markup ratio between large and small firms. The increased financing cost and the concentrated markets weaken firms' incentives to grow, thereby lowering long-run economic growth. Quantitative analysis suggests that bank concentration can explain about 3 percent of the U.S. productivity slowdown since the Act.

The second chapter, "Innovation, Reallocation and Growth: The Role of Access to Finance", examines how access to finance affects firm dynamics, market reallocation and economic growth in an endogenous growth model of firm innovation and reallocation. Central economic forces are the selection between low-type and high-type firms that differ in their accessibility to external finance and the selection between internal and external innovation within firms. In a quantitative application to the U.S. economy, the model provides a good fit to both cross-sectional and dynamic features of firm employment, markup and R&D. Quantitative analysis suggests that subsidies to R\&D of incumbent firms can lead to sizable gains.

The third chapter, "Job Polarization, Structural Change and Skills", studies the long-term evolution of labor market outcomes and its driving forces. The U.S. labor market has been polarized both across occupations (job polarization) and sectors (structural change), and the two trends have been closely linked since the 1970s. In this employment reallocation process, high-skilled and middle-skilled workers exhibit more within-sector shift across occupations, while low-skilled workers tend to move across sectors. To study the drivers of the polarizing U.S labor market and the role of worker skill in the employment reallocation, I develop a task-based assignment model that emphasizes heterogeneity in both tasks and workers. Workers with multi-dimensional skills choose over sector-occupation tasks that requires specific skill sets of workers. It is shown that task-specific technological progress can explain the U.S. employment reallocation across occupations and sectors. Technological progress in middle-skill occupations increase the demand for low-skill and high-skill occupations within sectors. Sectors that rely more heavily on middle-skill occupations grow relatively faster in TFP and shift employment to other sectors. Low-skilled workers are susceptible to between-sector shifts as workers are positive-assortatively selected into sectors and occupations. Changes in worker skill composition enlarges the relative TFP difference across sectors and amplifies the employment reallocation process. Calibrating the model to the U.S. economy, I find that the technology induced demand change accounts for the bulk of the employment reallocation between the 1970s and 2010s, with worker skill composition change serving as a complementary but significant factor.

Language

English (en)

Chair and Committee

Ping Wang

Committee Members

Gaetano Antinolfi, Costas Azariadis, Oksana Leukhina, Yongseok Shin,

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