This thesis studies different aspects of firm decisions by using a dynamic model. I estimate a dynamic model of the firm based on the trade-off theory of capital structure that endogenizes investment, leverage, and payout decisions. For the estimation of the model I use Efficient Method of Moments (EMM), which allows me to recover the structural parameters that best replicate the characteristics of the data. I start analyzing the question of whether target leverage varies over time. While this is a central issue in finance, there is no consensus in the literature on this point. I propose an explanation that reconciles some of the seemingly contradictory empirical evidence. The dynamic model generates a target leverage that changes over time and consistently reproduces the results of Lemmon, Roberts, and Zender (2008). These findings suggest that the time-varying target leverage assumption of the big bulk of the previous literature is not incompatible with the evidence presented by Lemmon, Roberts, and Zender (2008). Then I study how corporate income tax payments vary with the corporate income tax rate. The dynamic model produces a bell-shaped relationship between tax revenue and the tax rate that is consistent with the notion of the Laffer curve. The dynamic model generates the maximum tax revenue for a tax rate between 36% and 41%. Finally, I investigate the impact of financial constraints on investment decisions by firms. Model results show that investment-cash flow sensitivity is higher for less financially constrained firms. This result is consistent with Kaplan and Zingales (1997). The dynamic model also rationalizes why large and mature firms have a positive and significant investment-cash flow sensitivity.

The first chapter of this dissertation argues that privatization and other policy changes in China during the past decade had a direct effect on input prices. This is in contrast to most previous work, which instead emphasized the effect of privatization on productivity. I illustrate the importance of taking such differences into account by estimating the parameters of a static firm competition model using the Chinese Industrial Enterprises Database and calculating a measure of total factor productivity for each firm out of those estimates. The results of my analysis indicate that the percentage difference in productivity between private and state-owned firms may be overestimated by as much as 135 percentage points if the difference in input prices is not properly addressed. The second chapter of my dissertation establishes empirical support for such a difference in input prices by constructing a dynamic structural model of privatization, firm heterogeneity and industry evolution, and estimating its parameters using the Chinese Industrial Enterprises Database. My estimates of the model confirm many well documented institutional features about China's reform, including "grasp the large and let go of the small" policy, easy access to credit for state-owned enterprises (SOEs), and selection for privatization according to firms' probabilities of success. In addition, the estimated structural model provides the basic tool for policy simulations and enables us to see the effects of hypothetical policies, for example “grasp the small and let go of the large” and “removing SOEs’ easy access to credits”. In the last chapter, I study the effect of privatization of state-owned enterprises in China, focusing on not only the effect of privatization on a firm's productivity, but also its effect on market output allocation. I use the method proposed by Olley and Pakes (1996) to find improvements in average market productivities for all industries in China. This growth in productivity resulted from enterprises becoming more productive, but not from more efficient output allocation within the market. Private firms are proven to be more productive than state-owned enterprises in all industries, but privatization itself improved firm efficiency only for some industries.

I study the impact of the used goods market on pricing and profits in the video game industry and the implications of resale restrictions. I develop a modeling framework that incorporates (a) heterogeneous consumers who are forward looking in their buying an selling behaviors, (b) a strategic game producer who prices its products considering both inter-temporal price discrimination and price competition with used goods, (c) rational expectations on future prices by both consumers and the firm, and (d) market equilibria for both new and used-goods markets. Without observing sales data, I use equilibrium pricing solutions in my model and the varying rate of price decrease after a game's release to identify the sales volume of a game in every period as a percentage of its total demand. I develop a computationally tractable utility specification to solve the computational challenge comes with modeling the supply side equilibrium. I construct the demand function for a game from heterogeneous consumers whose valuations distribute on an interval, and partially characterize the consumers' decisions and reduce the dimensionality of the state space. Applying the model to a unique dataset of game prices collected from the Internet, I estimate the game-specific demand for multiple games released in the U.S. market. The results show significant variation across games in terms of shapes of valuation distributions, expected play time, degrees of consumers' preference for new over used games, and price sensitivities. Policy simulations show that the effects of prohibiting resale largely depend on the shape of a game's demand distribution, because most of the profits are gained from higher-valuation consumers who purchase the game when the price is high. Prohibiting resale does not dampen their willingness to pay for the game because their high utility from playing it. Moreover, higher expected future prices in the absence of the used-game market further reduces their incentives to wait. I find the predicted profit increase is significant for most games when reselling is prohibited. However, games with demand consisting mostly of low valuation consumers benefit less from this structural change, because (a) early sales increase only slightly given a much smaller proportion of high valuation consumers and (b) losing the option to resell significantly decreases the willingness to pay for low valuation consumers, forcing the firm to slash its prices dramatically over time. I find empirical evidence that a firm can be better off with the used game market. This suggests that though eliminating the resale market is generally optimal for popular games, retaining it can be more profitable for some games. / text