Essays on Aggregate Implications of Micro Distortions

Abstract

In this dissertation, I study the impact of the microstructure of the economy on aggregate outcomes. In the first essay, I analyze the welfare effects of producer market power in frameworks with free entry and endogenous technical change. My estimates indicate that the welfare losses due to market power are significant. If the social planner is only allowed to alter the markup values, they can increase social welfare by 20%. Sub-optimal markup distribution also accounts for 61% of the distance to the first best. In the second chapter, I investigate the determinants of producer market power in firm-to-firm trade. I show that whenever buyers and sellers are large relative to their industries, both buyer and supplier characteristics affect markup levels and pass-through rates. I show that, after 2000, the markup values of US public firms decline in buyer size. The relationship between seller size and markups is ambiguous. In contrast, in the earlier years, the surplus rates of producers increase in seller and buyer size. These findings are consistent with an increase in upstream and downstream concentration. In the third essay, I study the effect of producer heterogeneity on aggregate productivity growth. I build a theoretical framework that allows firms to have different innovation technologies. I then analyze the dynamics of the aggregate output and productivity growth in the settings with and without innovation heterogeneity. I also show how to incorporate heterogeneity in terms of innovation technologies in the conventional TFP estimation frameworks.