Essays on financial frictions occupational choice and trade
My dissertation consists of two chapters where I study the role of financial frictions and openness to trade on several macroeconomic variables such as gross domestic product or total factor productivity. In the first chapter, I study the effects that trade and multinational production barriers have on countries of different size. The gains from openness to trade and multinational production (MP) depend largely on country size. A large country may attract more foreign firms by closing itself to trade, while a small country may attract a larger amount of MP if trade costs with its neighbors are low because it can be used as an export platform. I develop a model to study these effects, where firms face non convex decisions of whether to serve a foreign country by exporting from the home country, exporting from a third country, or producing in the foreign country. I calibrate the model separately for South America and Europe. I find that the gains from openness in Europe double those in South America, and that the distribution of these gains varies less with size in South America. I also find that MP is more important in explaining the gains from openness in large countries, but the export platform mechanism is more important in small countries. Finally, I find that trade and MP have important implications for the size distribution of firms.In the second chapter, which is joint with Andres Erosa, we study the effects of financial frictions on occupational choice decisions and on economic inequality. To address this question, we develop a quantitative theory of entrepreneurship, income inequality, and financial frictions disciplined with household data from Brazil. Our theory extends Lucas (1978) by modeling heterogeneity in two skills: ?working and managerial skills. Consistently with the evidence, the theory implies three occupational categories: workers, employers, and self employed entrepreneurs. We find that the removal of financial frictions decreases self employment rates from 24% to 11% (with small effects on the number of employers) increases aggregate output by 48% and has non trivial effects on the distribution of income. We also find that while most households benefit from a reform that eliminates enforcement problems, the majority of employers (about two thirds) lose from the reform. By depressing the demand for labor, limited enforcement depresses the equilibrium wage rate, increasing the profits of employers. Our theory thus suggests that employers in Brazil may have a vested interested in maintaining a status quo with low enforcement.