Heterogeneity and Input Reallocation

Title of Dissertation: HETEROGENEITY AND INPUT REALLOCATION Eugénio Pinto, Doctor of Philosophy, 2006 Dissertation Directed by: Professor John Haltiwanger, Department of Economics Professor John Shea, Department of Economics In this dissertation, we analyze some patterns of aggregate job reallocation that are significantly determined by the coexistence of heterogeneous businesses in any industry. First, we argue that the interaction of non-strictly convex adjustment costs and learning about true efficiency can explain the significant growth of survivors in a cohort of entering firms. Using Portuguese data we find evidence that survivors are the main source of growth in the cohort’s average size, and that their contribution varies across sectors. By simulation, we show that we need adjustment costs to match this evidence with a selection model of industry dynamics. In a calibration of the model, we find that proportional costs and the fixed exit cost are key parameters in matching the evidence, and that firms in manufacturing learn relatively less initially about their efficiency, and are subject to much larger adjustment costs than firms in services. Second, we analyze how does structural heterogeneity across classes of firms affects the cyclical behavior of aggregate job flows. We find that types of firms whose optimal employment is relatively more determined by aggregate shocks than by idiosyncratic shocks influence the dynamics of aggregate job flows by more than they affect average aggregate flows. In Portuguese data, we conclude that large and old firms tend to affect aggregate dynamics by more than their already large employment shares would suggest. This tends to make job reallocation less procyclical than otherwise, and affects aggregate behavior in some sectors. Finally, as a background for the empirical analysis that is used in this dissertation, we analyze basic facts about the business cycle and gross job flows in Portugal from 1986 to 2000. We conclude that gross job flows are large and react in predictable ways to the business cycle and that patterns of job reallocation vary widely across sectors and firm’s age and size. HETEROGENEITY AND INPUT REALLOCATION