Essays in Macroeconomics

Abstract

This dissertation consists of three essays in macroeconomics. The first essay studies the relationship between firm liquidity and new product introduction during the 2007-2008 financial crisis. Using public firms' product announcement data, we find that cash-constrained firms increased launching of new products more than cash-abundant firms during the crisis. In contrast, we find no evidence of a difference in introduction of new product varieties as measured by trademarks. These findings suggest that liquidity constrained firms may have tried to generate more cash flows through sales of new products within existing product lines. Next, we turn to patent applications as a measure of the development of new technologies, which eventually lead to new products. We find that constrained firms reduced potentially radical patent applications by more, while we do not find a difference in likely typical patent applications. This is consistent with the view that liquidity constrained firms have lower risk tolerance. The second essay, co-authored with Seunghyup Lee, investigates the relationship between employment protection and firm R\&D investment. By increasing operating leverage, employment protection reduces the ability of financially constrained firms to undertake R\&D projects. We use the adoption of wrongful-discharge protections by state courts across the U.S. as a source of exogenous variation in the cost of adjusting labor downwards. We show that these protections increase the operating leverage of firms in these states. Among financially constrained firms, these court decisions reduce R\&D investment and amplify its procyclicality. Capital expenditures, however, are not affected regardless of the level of financial constraints. To show that wrongful discharge laws impact investment decisions by increasing operating leverage, we construct an industry layoff elasticity measure as a proxy for the exposure to the shock, and compare the operating leverage and investment responses of the firms with different levels of exposure. Last, we show that high R\&D firms hoard cash and issue more equities in response to the court decisions. We provide a corporate investment model with costly external finance and liquidity constraints that predicts these patterns. The third essay studies the welfare consequences of severance payments in an incomplete market setting when workers face private borrowing rates that are higher than the equilibrium interest rates. Given prices, the ex-ante benefit of severance payments is shown to be increasing in worker borrowing costs, in a finite period model. Steady-state numerical analysis reveals that severance payments are welfare-enhancing in an economy with high worker borrowing costs. These results provide an additional explanation of the generosity of severance payments in low per capita income countries.