ABSTRACTCHAPTER 1: A Structural Empirical Model of R&D Investment, Firm Heterogeneity, and Industry EvolutionThis paper develops and estimates a structural model of R&D investment and productivity evolution of manufacturing plants in the Korean electric motor industry from 1991 to 1996. Plant-level decisions for R&D investment, physical capital investment, entry, and exit are developed using a dynamic industry evolution model. Estimates of the structural parameters are used to quantify how a plants productivity is affected by its own R&D and by spillovers from the R&D of its competitors. In contrast to previous R&D studies, which usually investigate a collection of producers from various industries, this paper characterizes how the full set of dynamic decisions by each plant in a single industry interact with its own and its competitors productivity change. This allows the model to provide a detailed set of pathways connecting the plant-level R&D investment, productivity, physical investment, and turnover patterns observed in the data.The empirical model is estimated in two steps. In the first step, a model of static market competition is used to estimate the demand elasticity, returns to scale in production, and the process of plant level productivity. The initial productivity distribution for new entrants is also recovered. In the second step, a Simulated Method of Moments estimator is used to estimate the cost of R&D, the magnitude of the R&D spill-over, adjustment costs of physical investment, and the distribution of plant scrap values. To circumvent the computational burden of solving the industry equilibrium with a large number of plants in the second stage estimation, I apply the recent approximation method of Weintraub, Benkard and Van Roy (2005).CHAPTER 2: Entry and Exit in Geographic Markets (with Timothy Dunne, Shawn Klimek, and Mark Roberts).In this paper we estimate a structural model of firm entry and exit developed by Pakes, Ostrovsky, and Berry (2004) that can identify three separate components of the competitive process: the effect of an increase in the number of firms on the average profits of firms in a market, and the magnitudes of entry costs and firm scrap values that are key determinants of the degree of firm turnover.The empirical model is used to analyze the entry and exit patterns of establishments in two medical-related service industries, dentists and chiropractors. Using micro data collected as part of the Census of Service Industries, we measure the number of establishments, the flows of entering and exiting establishments, the average revenue and average profits for 754 small geographic markets in the U.S. at five-year intervals over the 1977-2002 periods. We use a three-step estimation procedure. In the first stage, the profit function parameters are estimated. In the second stage, we estimate the continuation and entry values directly by computing the average of the discounted values of future cash flows that establishments actually earned in the data up to the parameter of the scrap value distribution. Finally, the scrap value and entry cost distributions are estimated by maximizing the probability of observing the flows of entering and exiting establishments in the data.CHAPTER 3: Macroeconomic Implications of Size-dependent Policies (with Nezih Guner and Gustavo Ventura)Government policies that impose restrictions on the size of large establishments or firms, or promote small ones, are widespread across countries. In this paper, we develop a framework to systematically study policies of this type. We analyze a simple growth model with an endogenous size distribution of production units. We parameterize this model to account for the size distribution of establishments and for the (observed) large share of employment in large establishments. We then measure the cost of policies that distort the size of production units including their impact on productivity measures, the equilibrium number of establishments and their size distribution. We find that these effects are potentially large: policies that reduce the average size of establishments by 20% lead to reductions in output and output per establishment up to 8.1% and 25.6% respectively, as well as large increases in the number of establishments (23.5%).
