Firm and Industrial Dynamics Over the Business Cycles

This dissertation consists of three essays. In Chapter 1, we proposes a dynamic multi-sector production network model in which firms receive news on the future product-specific demand of a representative household. Since production takes time and firms in the production sectors are connected via input-output links, news on the future final demand of an individual product changes firms' forecasts of their future sales, creating economy-wide effects named as forecast shocks. Forecast shocks are transferred upwards through the supplier-customer connections in the network, from the buyer of an input good to the producer. The model explains the asymmetry in the transmission of individual shocks in the network and how shocks to the expectations generate real, persistent effects. The equilibrium is analytically solved and calibrated to the U.S. economy. Quantitative analysis then follows to examine the model performance. In Chapter 2, we incorporate a firm's project choice decision into a firm dynamics model with business cycle features to explain this empirical finding both qualitatively and quantitatively. In particular, all projects available have the same expected flow return and differ from one another only in the riskiness level. The endogenous option of exiting the market and limited funding for new investment jointly play an important role in motivating firms' risktaking behavior. The model predicts that relatively small firms are more likely to take risk and that the crosssectional productivity dispersion, measured as the variance/standard deviation of firm-level profitability, is larger in recessions. In Chapter 3, we consider the impact of job rotation in a directed search model in which firm sizes are endogenously determined, and match quality is initially unknown. In a large firm, job rotation allows the firm to at least partially ameliorate losses from mismatches of workers to jobs. As a result, in the unique equilibrium, large firms have higher labor productivity and lower separation rate. In contrast to the standard directed search model with multi-vacancy firms, this model can generate a positive correlation between firm size and wage without introducing exogenous productivity shocks or a non-concave production function. Degree Type Dissertation Degree Name Doctor of Philosophy (PhD) Graduate Group Economics First Advisor Dirk Krueger Subject Categories Economics This dissertation is available at ScholarlyCommons: http://repository.upenn.edu/edissertations/1470 FIRM AND INDUSTRIAL DYNAMICS OVER THE BUSINESS CYCLES