Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2009. / Includes bibliographical references. / This thesis consists of three chapters on innovation and economic growth. Chapter 1 is a joint work with Daron Acemoglu. We study the form of intellectual property rights (IPR) policy and licensing in the context of endogenous economic growth with step-by-step cumulative innovation. The main questions of the analysis are as follows. Should a company with a large technological lead receive the same IPR protection as a company with a more limited advantage? Should technological followers be able to license the products of technological leaders? We propose a general equilibrium framework to investigate these questions. IPR policy regulates whether followers in an industry can copy the technology of the leader and also how much they have to pay to license past innovations. We prove the existence of a steady-state equilibrium and characterize some of its properties. We then quantitatively investigate the implications of different types of IPR policy on the equilibrium growth rate and welfare. The two major results of this exercise are as follows. First, the growth rate and welfare in the standard models used in the (growth) literature can be improved significantly by introducing a simple form of licensing. Second and more importantly, full patent protection is not optimal from the viewpoint of maximizing welfare; instead, welfare-maximizing (and growth-maximizing) policy involves state-dependent IPR protection, providing greater protection to technological leaders that are further ahead than those that are close to their followers. / (cont.) This form of the welfare-maximizing policy is a result of the "trickle-down"effect, which implies that providing greater protection to firms that are further ahead of their followers than a certain threshold increases the R&D incentives also for all technological leaders that are less advanced than this threshold. Chapter 2 is an empirical study that analyses the relationship between firm size and innovation. The common practice in the endogenous growth literature is to assume a constant innovation quality (size) and focus only on innovation frequency. In this chapter, I test the validity of this assumption using Compustat and USPTO patent data to examine the relationship between firm size and innovation quality. Since R&D investment is the input and firm growth is the result of innovation, this chapter studies the relationship between firm size - firm growth and firm size - R&D intensity as well. The reduced form results uncover three stylized facts: Smaller firm grow faster, are more R&D intensive and more interestingly, produce higher quality innovations. These results are robust, among many other things, to sample selection and to differences in patenting behaviors. In Chapter 3, I propose a theoretical model to understand the microfoundations underlying these stylized facts. In this model, technologically heterogenous firms compete for innovation. A novelty of this model is that firms can endogenously choose not only the probability of innovation, but also the innovation quality. / (cont.) I prove the existence of the equilibrium and show that the model's predictions are consistent with the aforementioned reduced form evidences. These results rely on two assumptions: the concavity of the profit function with respect to firm size and the constant returns to scale property of the R&D production function. The intuition is that, when profits are concave, the incentives for radical innovation diminishes as firm size increases. As a result, R&D intensity and firm growth also decrease. Next, I estimate the structural parameters of the model using Simulated Methods of Moments and use the results to conduct a policy experiment. Since firms in this model do not internalize the positive externalities that they generate on other firms, there is underinvestment in R&D, so that there is scope for policy action through size-dependent R&D subsidies. In conclusion of this policy experiment, the optimal size-dependent R&D subsidy policy does considerably better than optimal uniform (size-independent) policy. Moreover, supporting small firms is more growth-enhancing than subsidizing big firms. For a large range of values for the elasticity of substitution, the growth enhancing effect dominates the negative impact of public spending on initial consumption. Therefore, the optimal (welfare-maximizing) policy provides higher subsidies to smaller firms. / by Ufuk, Akcigit. / Ph.D.

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2013. / Cataloged from PDF version of thesis. / Includes bibliographical references (p. 111-114). / The first chapter presents a model in which a principal requires an agent to work on multiple tasks, which require varying levels of effort. Initially the appropriate actions are unknown to the principal and so he cannot monitor the agent's effort; however he may succeed in learning the game over time. I provide conditions that ensure full learning and cooperation on all tasks. If these conditions are not met, then the performance of the relationship may depend critically on the order in which tasks are first required and on whether early attempts are successful. We may therefore see variation in long-run performance amongst partnerships facing an identical environment. The second chapter considers the role that mission statements made by firms may play in influencing workers' expectations, and whether these mission statements may thereby constitute informative cheap-talk. I consider a setting in which firms send costless mission statements at the start of the game, then with positive probability have an opportunity to send a costly signal of their type at a later stage. I show that this can generate informative cheap-talk in environments in which, absent the prospect of a costly signal, cheap-talk messages would otherwise be uninformative. However firms will face a welfare trade-off between informative communication and costly signaling, and moreover may be constrained in their ability to adapt to changing circumstances. In the third chapter I present a model of relational contracting in which the principal's type determines the probability that effort generates high output, and where this type is private information. In this setting the bonus payments will be driven by the agent's beliefs, and by the principal's desire to signal her type. I show that we will expect to see higher bonus payments following a run of poor output, given the need to restore the agent's confidence. I then consider an extension in which the agent receives a signal about the performance of the principal's competitors, and so the principal will be under more pressure to "match the market". I argue that this model may explain the dynamics of bonus payments following recessions. / by Sarah Elizabeth Venables. / Ph.D.

Thesis: Ph. D., Massachusetts Institute of Technology, Department of Economics, 2016. / "June 2016." Cataloged from PDF version of thesis. / Includes bibliographical references (pages 135-144). / The first chapter explores strategic insurer pricing in response to consumer inertia. A growing literature has documented evidence that consumers in health insurance markets are inertial, or behave as though they face substantial switching costs in choosing a health insurance plan. I investigate whether the private firms that provide prescription drug insurance through Medicare Part D exploit this inertia when setting prices. I first document descriptive evidence consistent with insurers initially setting low prices in order to "invest" in future demand before later raising prices to "harvest" inertial consumers. I then apply a two-step estimation approach following Bajari, Benkard and Levin (2007) to explore the implications of these invest and harvest incentives for equilibrium pricing, finding that on net, demand inertia reduces equilibrium prices (i.e. the invest incentive dominates the harvest incentive). Finally, I evaluate welfare consequences of policies that could be used to constrain insurers' ability to conduct such "invest-then-harvest" pricing patterns. I find, for example, that a policy change to cap premium increases would improve consumer welfare by both lowering average premiums and smoothing prices over time. Motivated by prior work on market size spurring innovation, the second chapter (co-authored with Manuel Hermosilla) explores the role of increased downstream demand in facilitating interfirm cooperation in the pharmaceutical industry, where licensing is a common form of collaboration between upstream innovators and downstream commercializers. We propose a simple model of licensing with heterogeneous match quality which predicts that positive demand shocks will increase the likelihood of licensing and improve match quality by reducing the relative importance of transaction costs. We then use the differential impacts of the introduction of Medicare Part D across drug categories 'targeting different ages of consumers as a source of variation in demand, and document empirical evidence consistent with the model. Using US county-level data on physician stock from the Area Resource File, the third chapter is devoted to uncovering and understanding the differential effects of medical schools on the supply of physician across regions. I use a difference-in-difference framework to compare changes in physician supply in areas closer to new medical school entries with regions further away. I find that a new medical school increased the physician supply by one to three times the county average level in the county where the medical school was located, relative to other counties. The broader regional effect was smaller but still substantial - a new medical school increased physician supply by one fourth to two thirds of the sample average in counties within 50 miles, relative to counties farther away. When tracking the effect over time, I find that a new medical school had the same impact in the year of entry and in the following 20 years, which indicates that most of the impacts could be attributed to the immediate responses. I find no effect on the physician supply in most of the pre-entry years, which supports the identifying assumption that locations of new medical schools were not correlated with other underlying determinants of physician supply. / by Yufei Wu. / Supply response to consumer inertia: strategic pricing in Medicare Part D -- Market size and innovation: the intermediary role of technology licensing -- Regional impacts of new medical school entries on the supply of physicians. / Ph. D.

Thesis: Ph. D., Massachusetts Institute of Technology, Department of Economics, 2018. / Cataloged from PDF version of thesis. / Includes bibliographical references. / This thesis consists of three chapters on the economics of health insurance. In the first chapter, Carlos Dobkin, Amy Finkelstein, and Matthew Notowidigdo and I use an event study approach to examine the economic consequences of hospital admissions in two datasets: survey data from the Health and Retirement Study, and hospitalization data linked to credit reports. For non-elderly adults with health insurance, hospital admissions increase out-of-pocket medical spending, unpaid medical bills, and bankruptcy, and reduce earnings, income, access to credit, and consumer borrowing. The earnings decline is substantial compared to the out-of-pocket spending increase, and is minimally insured prior to age-eligibility for Social Security Retirement Income. Relative to the insured non-elderly, the uninsured non-elderly experience much larger increases in unpaid medical bills and bankruptcy rates following a hospital admission. Hospital admissions trigger fewer than 5 percent of all bankruptcies in our sample. In the second chapter, Evan Mast and I investigate an information friction in Medicare Advantage-beneficiaries pay two premiums, and one is much more salient. We find a larger demand elasticity for the salient versus non-salient premium. A model of insurer plan design produces simulated premiums matching the observed distribution using these "behavioral" elasticities, but not when assuming equal elasticities across the two premiums. Removing the friction increases enrollment in low-premium plans, increasing consumer surplus $5/year with supply fixed and $73/year when including a supply response. In the final chapter, I use difference-in-differences and triple-difference methods to understand the effects of the Affordable Care Act Medicaid expansion on a number of labor supply indicators and find no significant evidence of a labor supply response. / by Raymond Kluender. / Ph. D.

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 1992. / Includes bibliographical references (leaves 163-170). / by Wallace Patrick Mullin. / Ph.D.

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2009. / Includes bibliographical references (p. 157-166). / This dissertation consists of three chapters analyzing the optimal design of insurance contracts. I consider three relevant contexts that change the central trade-off between the provision of insurance and the provision of incentives. The first chapter analyzes the role of biased beliefs for the optimal design of static and dynamic insurance contracts. Biased risk perceptions change the perceived value of insurance and the perceived returns to avoiding these risks. I show empirically that unemployed workers overestimate how quickly they will find work, but underestimate the return to their search efforts. I analyze how these biases drive a wedge between social and private insurance, and between naive and optimal policy implementation. The second chapter analyzes the role of training for the design of unemployment insurance. A worker's human capital falls upon displacement and depreciates during unemployment. Training counters the decrease in human capital, but also changes the willingness of the unemployed to search. I characterize the optimal unemployment insurance contract and analyze the optimal timing of unemployment benefits and training programs during unemployment. The third chapter analyzes the role of heterogeneity in risk perceptions for the optimal design of screening contracts in a model with moral hazard and adverse selection. I show how optimists receive less insurance than pessimists and I contrast the distortions in insurance coverage that arise with competing and monopolistic insurers. / (cont.) Heterogeneity in beliefs strengthens the case for government intervention in insurance markets and can explain the negative correlation between risk occurrence and insurance coverage found in empirical studies. / by Johannes Spinnewijn. / Ph.D.

This dissertation contains three essays on development economics, addressing trade liberalization and inequality in Brazil, a large-scale child health intervention in Indonesia, and conceptual and methodological aspects of measuring household economic well-being. The three consider different aspects of household welfare and its determinants. The first chapter examines the effect of a macroeconomic policy on household welfare; the second chapter studies the effect of a microeconomic intervention on a component of household welfare, that of children; the final chapter explores how we might conceive of and measure household welfare itself. Using nationally representative, economy-wide data, the first chapter investigates the relative importance of trade-mandated effects on industry wage premiums, industry and economy-wide skill premiums, and employment flows in accounting for changes in the wage distribution in Brazil during the 1988-1995 trade liberalization. Unlike in other Latin American countries, trade liberalization appears to have made a significant contribution towards a reduction in wage inequality. These effects have not occurred through changes in industry-specific (wage or skill) premiums. Instead, they appear to have been channeled through substantial employment flows across sectors and formality categories. Changes in the economy-wide skill premium are also important. Indonesia's posyandu program is a very large child health and nutrition intervention with over 200,000 posts in 65,000 villages, introduced in the 1980s. The second chapter examines the short- and medium-term effects of the program. While the field efficacy of the individual components - immunization, vitamin A supplementation, oral rehydration salts, and growth monitoring and nutrition education - has been well established, there has been little evidence from micro-data of integrated programs being successfully implemented at scale. However, using household-level data and exploiting differences in timing and location of new posyandu, it appears that the program reduced under-five mortality by 36 deaths per 1,000 children, which is consistent with the reduction we would expect from the known clinical efficacy of its interventions, and represents 40 percent of the national decrease from 1980-2000. The chances of being underweight or stunted were reduced by 19 to 26 percent, with the effect concentrated in children two years and younger. There is also evidence that improved nutritional status led to large increases in test scores (0.24 to 0.37 standard deviations). A comparison of costs per child and cost-effectiveness with similar programs in other countries and other interventions indicates that the posyandu program is amongst the most cost-effective child health care interventions ever implemented. The chapter briefly examines why this large-scale program was successful in Indonesia when there is limited evidence that similar programs have been effective elsewhere in the developing world. The final chapter examines the construction and use of household indices with asset data, a recent and popular approach to measuring economic well-being. After outlining the conceptual relationships and differences between components of economic well-being and monetary measures, a rich Indonesian dataset is used to evaluate methods of index construction, including different combinations of the underlying asset indicators and the various approaches to weighting such variables (PCA, PFA, MCA and DiHOPIT). Different weights are shown to have generally little empirical difference. However, the choice of underlying variables is found to be important; most choices lead to a good measure of consumption, but only a few produce a good measure of wealth. Based on the empirical results and theoretical discussion, approaches are recommended for constructing asset indices given different research objectives. In addition, the potential bias when using or omitting asset indices as proxies for particular omitted variables is estimated. Multidimensional extensions measuring components of economic well-being separately are also introduced.

Developing countries are more likely than developed countries to pursue a fixed exchange rate regime, yet this pattern is not directly predicted by conventional theories of optimum currency area. The first Chapter proposes a new theory of exchange rate regime choice---different from the policy maker's credibility argument in the "fear of floating" theory---that stresses the roles of both stage of economic development and labor market frictions. In general, for a typical developing country with low labor productivity and high labor market frictions, a fixed exchange rate regime would yield a higher level of welfare than a floating regime as the former generates more export revenue. The opposite is true for a country with high labor productivity or a more flexible labor market. We provide empirical evidence that is consistent with the key predictions of the theory. The second chapter investigates some new hypothesis of the high savings rates and current account surpluses in countries like China. Large savings and current account surpluses by China and other countries are said to be a contributor to the global current account imbalances. In this chapter, we propose a theory of excess savings based on a major transformation in many of these societies, namely, a steady increase in the surplus of men relative to women. We construct an OLG model with two sexes and a desire to marry. We show conditions under which an intensified competition in the marriage market can induce men to raise their savings rate, and produce a rise in both the aggregate savings and current account surplus. This effect is economically significant if the biological desire to have a partner of the opposite sex is strong. A calibration of the model suggests that this factor could generate economically significant current account responses, or between one third and a half of the actual current account imbalances observed in the data. In the third chapter, we analyze how the social structual change--the rise in the sex ratios--may affect the real exchange rate. We find that a rise in the sex ratio, in theory, can simultaneously generate a decline in the real exchange rate (RER) and a rise in the current account surplus. We demonstrate this logic through both a savings channel and an effective labor supply channel. In this model, a low RER is not a cause of the current account surplus, nor is it a consequence of currency manipulations. Empirically, those economies with a high sex ratio tend to have a low real exchange rate, beyond what can be explained by the Balassa-Samuelson effect, financial underdevelopment, dependence ratio, and exchange rate regime classifications. Once these factors are accounted for, the Chinese real exchange rate is estimated to be undervalued by only a relatively trivial amount. The last chapter studies the entrepreneurial activities in countries like China who have experienced a severe rise in the pre-marriage age cohort's sex ratio. In this chapter, we present a theoretical model and find that, when the sex ratio is large, a rise in the sex ratio will induce men to take the risk and pursue the high returns, which leads to an increase in the entrepreneurial activities in the economy. In an open economy model with two sectors, a risky sector and a risk free sector, we show that a country with a very skewed sex ratio is more likely to have a comparative advantage in the risky sectors. We provide empirical evidence that is consistent with the theoretical predictions.

This thesis is a compilation of three separate and distinct papers on topics in international finance and the recent financial crisis. Chapter one links the foreign exchange risk premium to macroeconomic risk by studying the options market around macroeconomic news releases. Using a unique data set of overnight currency option prices, I study the reaction of the entire state price density to both anticipated and recently occurring macroeconomic news releases for both US and foreign announcements. I then use intraday data to compare the behavior of the physical pdf around these news releases over the same tenor as the option. I find significant movements in the implied distribution that can be linked to macroeconomic news both ex-ante and ex-post. The volatility risk premium in the overnight options market is large across all currencies, and a strategy that sells insurance through the form of overnight straddles around US non-farm payroll releases earns significant profits. Nonetheless, a significant portion of the volatility risk premium remains that cannot be explained through macroeconomic news despite the short lifespan of these options. Chapter two studies the evolution of last-resort operations in the recent credit crisis of 2007-2008. The financial crisis that began in 2007 took place in the context of a secular shift from a bank-loan financial system to a capital-markets financial system; that is, from one based on nontradable financial assets, with banks playing the key intermediary role, to one based on tradable securities, with dealers playing the key intermediary role. We argue that the system's response to the crisis can be viewed as moving from a private lender of last resort, through a public lender of last resort, to a dealer of last resort. It was the last that was finally able to stabilize the system, because it is the response suited to a liquidity crisis in the capital-markets financial system where the problem arose. We use a balance-sheet approach to trace out the breakdown of the so-called shadow banking system and the measures taken first in the private money markets and then by the Federal Reserve to restore liquidity to the financial system. Chapter three studies the effect of hedging imbalances in the foreign exchange market as a possible explanation for deviations from Uncovered Interest Parity. Speculators, becoming weary of holding excess demand for forward hedges, hedge their own exposure in the currency options market. The subsequent increase in option prices is a consequence of this market overhang and is reflected in the implied volatility of currency options. Separating out implied from forecast volatility, we construct a measure of hedging imbalances and add this to the standard UIP regression. For some currencies, a partial rehabilitation of UIP is found.

Chapter 1 examines examines how trade finance may help explain the great trade collapse. The financial crisis of 2008-2009, the most severe world macroeconomic shock since the Great Depression, brought about a much more dramatic collapse in trade relative to GDP. This is called the "great trade collapse". I begin by exploring the differences between international and domestic trade finance. In particular, I endogenize the relative riskiness of international and domestic trade finance loans, and show why a letter of credit is used exclusively for international trade. The model explains the role of trade finance in the recent great trade collapse through two mechanisms: first, the riskiness of international transactions increases relative to domestic transactions during economic downturns, and second, international trade finance is more sensitive to adverse loan supply shocks than domestic trade finance. Both lead to larger drops in trade than domestic output during a recession. In addition, the exclusive use of a letter of credit in international transactions exacerbates a collapse in trade during a financial crisis. The basic model considers banks' optimal screening decisions in the presence of counterparty default risks. In equilibrium, banks will maintain a higher precision screening test for domestic firms and a lower precision screening test for foreign firms, which constitutes the main mechanism for the aforementioned results. In Chapter 2, I re-evaluate conventional wisdom in the literature that inward Foreign Direct Investment (FDI) benefits a host country, by increasing the competitive pressure and reducing inefficiency in the local industry. Such pro-competitive aspects of FDI are countered by the concern that the emergence of foreign firms crowds out local firms. This paper uses a heterogenous firms model to examine the pro-competitive channel through which FDI affects national weflare. Symmetric FDI liberalization improves net welfare across both participating countries. Breaking down the effects of FDI into source- and host-country, the country from which the FDI originates experiences a welfare gain following liberalization. However, a counterintuitive finding is that the welfare of the host country falls. This is explained by the production relocation process that leads to an increase in the mass of domestic firms in the source country and a decrease in the host country. In the long run, welfare losses from a decrease in the mass of domestic firms outweigh welfare gains from a price reduction from FDI goods in the host country. Chapter 3, joint work with with Professor Amit Khandelwal and Professor Shang-Jin Wei from Columbia Business School, documents that intermediaries play an important role in facilitating international trade. We modify a heterogeneous firm model to allow for an intermediary sector. The model predicts that firms will endogenously select their mode of export--either directly or indirectly through an intermediary--based on productivity. The model also predicts that intermediaries will be relatively more important in markets that are more difficult to penetrate. We provide empirical confirmation for these predictions using the firm-level census of China's trade, and generate new facts regarding the activity of intermediaries. We also provide evidence that firms begin to export directly after exporting through intermediaries.