ESSAYS ON HETEROGENEITY, INVESTMENT

ESSAYS ON HETEROGENEITY, INVESTMENT AND AGGREGATE FLUCTUATIONS
JULIETA CAUNEDO
PhD DISSERTATION IN ECONOMICS
WASHINGTON UNIVERSITY IN ST LOUIS
This dissertation investigates the effects of agents' investment decisions under uncertainty on
aggregate productivity and economic activity. The dissertation is organized in three chapters.
The first one studies how irreversibilities and indivisibilities at the firm level generate
disparities in marginal products of inputs. It provides a tractable framework for the study of
constrained optimal allocations in models of firm dynamics with aggregate uncertainty. In
static models, dispersion in marginal products is a sign of inefficiency in allocations. This
conclusion need not hold when we allow firms to make endogenous technological decisions
under uncertainty in the presence of irreversibilities and indivisibilities. The constrained
optimal allocation may display dispersion in marginal products. The paper illustrates that
the level of dispersion observed in a narrowly defined industry is not independent of other
features of the economy such as the persistence and volatility of the business cycle. The
second chapter studies life cycle employment profiles of firms operating in countries at
different stages of development. Consistent with the literature, it documents steeper
employment profiles in developed countries than in developing ones. The working thesis is
that uncertainty (broadly defined to include political instability, changes in tax regimes,
changes in terms of trade or firm demand, etc) affects firms investment decisions during their
life cycle, and through them, the overall productivity gains in the economy. The third chapter
revisits an old question in business cycle theory: What is the role of investment specific and
neutral shocks in shaping output volatility? The essay documents new facts on the
movements of cost shares of intermediate inputs across US investment and consumption
sectors. These facts are then used to discipline the transmission of sectoral shocks to the
aggregate economy within a multisector RBC model with intermediate goods. I find that
neutral shocks become relatively more important in generating output volatility when cost
shares are allowed to fluctuate as in the data. Additionally, the paper provides conditions for
the existence of a balanced growth path in which all intermediate inputs are used in
production, yet productivity growth in the investment and consumption sectors might differ.
St. Louis, September 2013