This thesis studies the impact of transaction costs on stocks prices and examine the impact of institutional investors and high frequency traders (HFTs) on market quality and transaction costs. It is comprised of three chapters. Chapter 2 uses a clean and novel field experiment to study how stock prices of publicly listed companies respond to changes in transaction costs. Using the SEC's pilot program that increased the tick size for approximately 1,200 randomly chosen stocks, we find a decrease in market capitalization of $7 billion for stocks affected by the larger tick size relative to a control group. We find that the increase in the present value of transaction costs accounts for a small percentage of the price decrease. We study channels of price variation due to changes in expected returns: investor horizon, liquidity risk, and information risk. The evidence suggests that trading frictions affect the cost of capital. Chapter 3 examines the effects of multimarket high-frequency trading (HFT) activity on liquidity co-movements across different markets. Multimarket trading by HFTs connects individual markets in a single network, which should induce stronger network-wide liquidity co-movements. We use the staggered introduction of an alternative trading platform, Chi-X, in European equity markets as our instrument for an exogenous increase in multimarket HFT activity. Consistent with our predictions, we find that liquidity co-movements within the aggregate network of European markets significantly increase after the introduction of Chi-X and even exceed liquidity co-movements within the home market. They are especially strong in down markets and for stocks with a higher intensity of HFT trading in the post-Chi-X period. Chapter 4 studies optimality of trade execution by institutional trading desks. We document the presence of negative autocorrelation in intraday stock return and show that the temporary price pressure is larger at the beginning and the end of the day. Institutional trading volume exhibits similar intraday pattern. We relate the periodity of price pressure to trading desks' performance using a proprietary database of institutional investor trades. We find that execution quality is the worst at the end of the day yet institutional trading volume is also surprisingly high. Poorer performing brokers in terms of execution shortfall trade more in the last hour of the day, have a higher execution cost at the end of the day, and carry out less order splitting at the end of the day. Our findings suggest that intraday price pressure stems from end of the day clustering of under-performing trading desks strategies results in higher trading costs and poorer execution quality. A trading strategy exploiting this intraday predictability yields a monthly return of 16.11%. Our results have implications on the impact of broker selection and execution strategy on trading costs.

In Chapter 1, I develop a theory of activism and polarization in the context of electoral competition. I establish that the relationship between ideological polarization of activists and political polarization depends critically on the activists' willingness to engage in the campaign. Specifically, when the willingness to engage is within a threshold, increased partisanship among activists reduces political polarization – meaning candidates compromise rather than diverge. Welfare results suggests that partisan gap could hurt voters when activists have a high willingness to engage. In Chapter 2, I analyze a modified version of the classic Crawford-Sobel (CS) model of strategic communication between an informed Sender and uninformed Receiver, with the following two innovations: both players now take actions, and they are strategic substitutes. Contrary to the CS setup, the modified game does allow for perfect information revelation. When the Sender is able to compensate sufficiently for every state, there is full information revelation. When this is violated, there are only partial revelation equilibria. Under partial revelation, the Sender reveals information up to a threshold state, and pools beyond this threshold, resulting in loss of information. Welfare analysis suggests that a partial revelation equilibrium with higher threshold is both ex-ante Pareto efficient and interim efficient. In Chapter 3, we develop a model of alliance formation between players with the following features: substitutability in actions; a need for information sharing; preference heterogeneity; and, resource constraints. The main result is the following: with public communication, there is full information aggregation as long as preferences of players are sufficiently cohesive. We derive a precise bound to characterize cohesiveness, and provide an informational rationale for alliance formation.

This thesis analyses different aspects of financial crises with a focus on the role of pecuniary externalities. The topics explored in these essays are as follows: Chapter 1 provides background on issues of illiquidity and insolvency, and discusses how the two can interact. Chapter 2 studies pecuniary externalities in a `bank run' model where banks supply credit in the form of marketable securities. An aggregate liquidity shock, which triggers `fire sales' of such securities, can lead to insolvency when their value falls. So, in this type of model, a run on several banks can lead to insolvency driven pecuniary externalities. Chapter 3 explores three explanations of the U.S. subprime crisis; insolvency due to externalities, insolvency due to cheating, and illiquidity driven by panic. We argue that these narratives should be treated as complements (rather than as substitutes), with each playing an important role at different stages of the crisis. Chapter 4 studies the reversibility of shocks in a general equilibrium model of competitive markets with heterogeneous beliefs. I find that heterogeneous beliefs can amplify shocks; and, due to asymmetric adjustment of risky asset prices, they can also lead to systemic default when a group of optimistic agents exits the market.

Price and wage setting are key elements in empirical and theoretical macroeconomic research. In recent years, large micro datasets with millions of observations have expanded our knowledge of wage and price setting practices. Aside from addressing old questions, new salient facts have emerged and have led to improvements, clarifications, criticisms and even new research lines. One of these new findings in microeconomic research is the high degree of heterogeneity in the behaviour of price and wage setters. This dissertation adds to the research of using large micro datasets to document heterogeneity in price and wage setting, its implications for aggregate dynamics and potential drivers shaping heterogeneous responses. In chapter one, we provide an introduction to our research on price and wage heterogeneity and provide a short summary of the following two chapters. In chapter two, we merge three large price and wage micro-datasets at industry level and show that the frequency of price and wage adjustments are positively correlated. Furthermore, using a multi-sector DSGE model, we find that adding heterogeneity in both prices and wages generates small differences in aggregate dynamics compared to a model with heterogeneity in only one of them. In chapter three, we investigate whether price responses to exchange rate shocks, the so-called exchange-rate pass-through, are asymmetric across regions and type of goods. Results suggest heterogeneous pass-through elasticities and that regional and industry characteristics play a role in shaping this heterogeneity. For instance, distance to the border, import intensity, price change dispersion and expenditure share affect positively the degree of pass-through; while regional market density has a negative relationship with pass-through rates. In chapter four, we conclude by presenting a recap of findings from the two main chapters of this dissertation and outline future research.

Lam Yiu-ting. / Thesis (M.Phil.)--Chinese University of Hong Kong, 2004. / Includes bibliographical references (leaves 124-126). / Abstracts in English and Chinese. / Chapter 1 --- Introduction --- p.3 / Chapter 1.1 --- Literature review --- p.4 / Chapter 1.2 --- Summary of our results --- p.9 / Chapter 2 --- Intergroup externalities and market demand --- p.12 / Chapter 2.1 --- Introduction --- p.12 / Chapter 2.2 --- Results --- p.13 / Chapter 2.3 --- Proofs of Theorems 1 and 2 --- p.23 / Chapter 2.4 --- Conclusions --- p.31 / Chapter 2.5 --- Appendix --- p.32 / Chapter 2.5.1 --- Proofs for Paper 1 --- p.32 / Chapter 2.5.2 --- Graphs for Paper 1 --- p.47 / Chapter 3 --- Signalling goods and market demand --- p.51 / Chapter 3.1 --- Introduction --- p.51 / Chapter 3.2 --- Summary of Corneo and Jeanne (1997) --- p.53 / Chapter 3.3 --- Multiple signalling goods --- p.57 / Chapter 3.3.1 --- Our Model --- p.57 / Chapter 3.3.2 --- Constraints on the unobserved rank utility function --- p.63 / Chapter 3.3.3 --- Snobbish versus conformist --- p.68 / Chapter 3.3.4 --- Welfare implication --- p.80 / Chapter 3.4 --- Conclusions --- p.87 / Chapter 3.5 --- Appendix --- p.89 / Chapter 3.5.1 --- Proofs of our Lemmas --- p.89 / Chapter 3.5.2 --- "Proof of the derivation of SB, SA, R1 and R2" --- p.90 / Chapter 3.5.3 --- Examples about unobserved rank utility functions --- p.93 / Chapter 3.5.4 --- Proofs of Propositions 7 and 8 --- p.97 / Chapter 3.5.5 --- Illustration of Propositions 7 and 8 by examples --- p.98 / Chapter 3.5.6 --- Proof of Theorem 3 --- p.103 / Chapter 3.5.7 --- Details for own price effects --- p.104 / Chapter 3.5.8 --- Details for cross price effects --- p.114 / Chapter 4 --- Summary of the investigative research --- p.123

As a consequence of the Great Recession (2007-09), the standard New Keynesian model for analyzing optimal policy has changed from assuming frictionless financial markets to including financial rigidities. These changes render the new framework suitable for analyzing the interaction between macroeconomic policy and financial events. In the present dissertation, I analyze optimal monetary, unconventional, and macro-prudential policy under commitment. I make use of a model with a banking sector that faces balance sheet constraints. In order to emphasize the role played by monetary policy in containing financial instability, in the first chapter the sole policy instrument is the nominal interest rate. Then, I allow the central bank to make use of additional policy instruments. In the second chapter, the central bank can undertake purchases of private securities. Finally, the third chapter considers the optimal mix between monetary and prudential policy. Chapter 1. In order to emphasize the role played by the monetary policy in containing financial instability, I assume that the sole policy instrument is the nominal interest rate. The main distortions in this economy are: the monopolistic competition, sticky prices, and the balance sheet constraint of banks. Sticky prices allow monetary policy to have real effects. This friction interacts with the financial distortions and create trade-offs for the central bank. If a financial shock hits, the gap between the actual and the efficient allocations widens. This fluctuation is costly and the central bank attempts to stabilize the financial market, but the cost is fluctuation in inflation. The main result of this chapter is that financial events matter. Stabilizing the financial sector is welfare improving, but with only one policy instrument the central bank cannot stabilize inflation and financial variables at the same time. A modified Taylor rule that consider a feedback parameter on the deviations of the cost of credit from its steady state level can implement the optimal policy. However, in this framework there are more objectives than policy instruments. In the next step, I allow the central bank to use asset purchases of private securities and I deal with the optimal mix of conventional and unconventional monetary policy. Chapter 2. In this chapter, I extend the model in chapter 1 in order to allow central bank to undertake direct lending to firms. Asset purchases is the unconventional policy instrument. In this framework, the central bank affect the price of credit (interest rate) and the provision of credit (lending in the private credit markets). The nominal interest rate influences the cost of credit. The credit intermediation by the central bank seeks to influence the availability of and the price of credit. Together, the conventional and unconventional policy can serve to stabilize inflation and the financial markets. The central bank can implement the optimal policy by means of two policy rules: the conventional Taylor rule which sets the nominal interest rate, and an asset purchases rule. Unconventional monetary policy can give a hand to conventional policy in order to stabilize inflation and financial activity. However, if the central bank cannot access to unconventional means to stabilize the economy, monetary policy would still need support from other branches of policy in order to achieve price and financial stability. Even if the economy can be stabilized with monetary policy alone, the question is can it be stabilized more effectively with macro-prudential policies working alongside monetary policy? The model in chapter three is designed to answer this question. Chapter 3. In this chapter, I consider the optimal policy mix between monetary and prudential policy. I make substantial modifications to the model used in chapters 1, and 2, in order to make it useful in assessing macro-prudential policies consistent with the evidence. In the model, the banks face balance sheet constraints. They lend to households and firms. Agent are heterogeneous: firstly, they are poor or rich; secondly, the groups differ by their degree of patience; thirdly, as in the empirical evidence, the poorest contribute more to aggregate consumption than to the aggregate disposable income, I capture this by allowing the poor-borrowers to possess external habits, while the rich-savers possess internal habits in consumption. The habits externality drives these agents to overconsume and to overborrow. Given that consumers with external habits overborrow from banks, there are motives to introducing reserve requirements as a prudential instrument. The reserve requirement acts to reduce the overconsumption. The increase in the reserve requirement makes the credit more expensive and the central bank can stabilize the economy when the shocks hit.

Productivity - the efficiency with which firms transform inputs into outputs - is the root of economic growth and the improvement of living standards. This thesis explores different financial frictions that affect productivity at the corporate level and their aggregate consequences. The first chapter, “Credit Market Frictions and the Productivity Slowdown”, is joint work with John Van Reenen and Timothy Besley. UK labour productivity growth has been particularly weak since the financial crisis. We develop a theoretical framework to quantitatively assess the magnitude of financial frictions and their impact on aggregate productivity. We apply this framework to administrative panel data on UK firms. The approach highlights a firm’s default probability as a sufficient statistic for credit frictions. We use Standard and Poor’s "PD Model" algorithm to measure market participants’ perceptions of firm-specific default risk. The theoretical framework suggests an aggregate measure of credit market inefficiency which we show can be applied to UK administrative panel data to explain how far the dramatic productivity slowdown in the wake of the crisis is due to credit market frictions. We find that credit frictions cause a loss of 7% to 9% of GDP on average per year in 2004-12. These frictions increased during the crisis and lingered thereafter accounting for between one-quarter and one-third of the productivity fall in 2008-2009 and of the gap between actual and trend productivity by the end of 2012. The second chapter, “Management practices, precautionary savings, and company investment dynamics”, investigates a potential channel behind the well-documented positive correlation between the quality of management practices and firm performance. The main hypothesis of the paper is that financially constrained firms accumulate larger cash reserves when they are better managed. This allows them to avoid the costs of underinvestment when future profitable investment opportunities arise. The theoretical analysis predicts that well managed firms which face financial constraints save relatively more out of their cash flows and accumulate more cash when their cash flows are more volatile. This enhanced precautionary behaviour arises because management quality alleviates agency problems between equity holders and managers. The empirical analysis provides evidence to support these predictions using data from the World Management Survey and administrative and accounting data on UK firms. A direct consequence of this enhanced precautionary behaviour is that well managed firms invest more efficiently. Specifically, they adjust more quickly towards their long-run equilibrium capital stock when their current capital stock falls short of the latter. The paper provides evidence of this using a dynamic model of investment. The third chapter, “When Does Leverage Hurt Productivity Growth? A Firm-Level Analysis”, is joint work with Fabrizio Coricelli, Nigel Driffield, and Sarmistha Pal. Following the global financial crisis, several macroeconomic contributions have highlighted the risks of excessive credit expansion. In particular, too much finance can have a negative impact on growth. We examine the microeconomic foundations of this argument, positing a non-monotonic relationship between leverage and firm-level total factor productivity (TFP) growth. A threshold regression model estimated on a sample of Central and Eastern European countries confirms that TFP growth increases with leverage until the latter reaches a critical threshold beyond which leverage lowers TFP growth. We find similar non-monotonic relationships between leverage and proxies for firm value. The fourth chapter, “The sullying effect of credit sclerosis on productivity”, explores the impact of depressed credit flows on productivity in a partial equilibrium search and matching model of the banking market. Reputational costs associated with the termination of lending relationships drive a wedge between rates on new and existing loans. This induces misallocation of capital across borrowers. The phenomenon is one of "credit sclerosis": Low-productivity firms are kept alive through subsidised loan rates, while high-productivity entrants face an inefficiently high cost of borrowing and limited supply of new loan facilities. As a consequence, too much credit is allocated to old firms. Aggregate labour productivity and TFP are reduced. The model also sheds some light on why a policy tool like the UK’s Funding for Lending Scheme might fail to revive productivity in the presence of costly loan termination.

This thesis presents four distinct essays that lie at the intersection of economics and computation. The first essay constructs an abstract framework for defining skills gaps, mismatches and shortages geometrically and thinking about these phenomena in a unified, formal way. It then develops a job matching model with imperfect information, in which skills mismatches influence the job application decisions of the workers, while skills gaps and shortages shape the competition for workers on the resulting bipartite job applications network. The tools proposed in this chapter could in future work be employed as the main ingredients of an agent-based model used to investigate how skills gaps, mismatches and shortages affect equilibrium outcomes. The second chapter designs and tests machine learning algorithms to classify 33 million UK online vacancy postings into STEM and non-STEM jobs based on the keywords collected from the vacancy descriptions and job titles. The goal is to investigate whether jobs in “non-STEM” occupations (e.g. Graphic Designers, Economists) also require and value STEM knowledge and skills (e.g. “Microsoft C#”, “Systems Engineering”), thereby contributing to the debate on whether or not the “STEM pipeline leakage” – the fact that less than half of STEM graduates in the UK work in STEM occupations - should be considered as highly problematic. Chapter 3 relates to empirical growth. It proposes a programming algorithm, called “iterative Fit and Filter” (iFF), that extracts trend growth as a sequence of medium/long term average growth rates, and applies it on a sample of over 150 countries. The paper then develops an econometric framework that relates the conditional probabilities of up and down-shifts in trend growth next year to the country's current characteristics, e.g. the growth environment, level of development, demographics, institutions, etc. Finally, Chapter 4 studies credit risk spillovers in financial networks by modelling default as a multi-stage disease with each credit-rating corresponding to a new infection phase. The paper derives analytical and proposes computer simulation-based indicators of systemic importance and vulnerability, then applies them in the context of the Eurozone sovereign debt crisis.

This thesis contains three chapters examining firms’ behaviour and decision making when they seek to influence policies in the US through lobbying activities. The first chapter studies the main trade-off that firms face when they face the decision to integrate or outsource knowledge workers. The chapter proposes a model that predicts that firms requiring large firm-specific skills, or low levels of issue-specific skills, or facing a large number of transactions will integrate as opposed to outsource the service provider. Using a newly collected dataset on the US federal lobbying industry, I conduct firm-fixed effect estimations and I find strong evidence supporting the theoretical predictions. To provide further empirical evidence, I exploit a quasi-experiment that the Oil and Gas industry faced: The BP oil spill. The spill increased the issue-specific skills needed to conduct advocacy activities and in line with the theory developed in the chapter, I show that the affected industry started using more external, as opposed to internal lobbyists after the oil spill. The second chapter studies the effect of a technological upgrade on firms’ vertical integration decision. I use the model proposed in the first chapter to show that a technological shock, introduced by the Open Government Act decreased the cost of acquiring issue-specific skills, which in turn, made firms less likely to outsource. Then, I use structural models to measure the magnitude of this technological effect and conduct counterfactual exercises to study the influence that the regulation had on the industry. The third chapter studies the relationship between lobbying expenditures and market structure. I show that less and no more concentrated industries spend more on lobbying. To explain this empirical puzzle, I propose a theoretical model that includes the level of excludability in the payoffs. I provide empirical evidence that firms in less concentrated industries tend to lobby for more excludable goods and I show that including this dimension can explain the empirical puzzle. To provide causal evidence, I use national-level mergers that change citylevel market structures. Collecting a new data set of city-level lobbying expenditures, I show that controlling for the level of excludability in the payoffs, more concentrated industries spend more on lobbying efforts.

This thesis consists of three chapters on public and development economics that study incentives in public policies from the perspective of microeconomics. It is devoted to understanding behavioural responses in public policies that are relevant to its design in each domain, including trading in market with frictions, enrolment in education and child marriage practice for young girls, and childcare resource allocation in family. Chapter 1 studies how transaction tax policy affect market with frictions. Transaction tax in property market, with tax rate decreasing in holding period of property, received attention from governments in Asia for moderating speculation since 2000s. Using administrative transaction record of property, this chapter studies the behavioural response to the transaction tax in the timing of transaction, tax incidence and selection of buyers in Hong Kong and Singapore. I find that the inherent tax incentives, in the form of tax notches, induced tax avoidance behaviour in the timing of transaction, and average buyer and seller are willing to wait 3-4 weeks to avoid 1% of transaction tax. Exploiting discontinuity in tax liability at daily level, I find that the tax policy has impact on transaction activity that links closely to its rate and lower the overall chance of a property sold. Buyers bear significant tax burden on seller specific tax even when tax-free sellers are abundant in the market both evidence suggest strong search friction in property market. I also find that the differential tax rate in holding duration produce selection effect among buyers with different ex ante probability of trade in the taxable holding period. This chapter contributes to understanding the nature of transaction tax in markets with search friction. Chapter 2, a joint work with S Roy, studies the impact of matrimonial laws introduced by the British in colonial India during 1800s and early 1900s. Legal reforms on marriage practices, including laws on minimum marriage age and female infanticide, were introduced in British Provinces - district that were under British direct rule. Exploiting quasi-random variations of districts that were former British Provinces within each post-independent Indian states, this chapter studies their impact on female education and under age marriages in post-Independent India. From independent sources of large-scale micro data, including administrative records from schools and representative household surveys, we find that in former British Provinces females have 5% lower chances of marrying under the current legal age, and 1.6% higher chance of attending school at 10-16 years old. Child Marriage abolition Act was introduced in 1931, which raised the minimum age of marriage for female to 14. With newly digitized data on district level marriage pattern from Census of India 1901-1931, we find that the act distorts the marriage market in the short-run by increasing the likelihood of girls marrying at young age as it was preannounced before its implementation, while district more aware of the law exhibit lower child marriage in the long run. It suggest that expansion of education for girls in India has demand side constraints from child marriage practice that has historical root. The introduction of prenatal sex-detection technologies in India has led to a phenomenal increase in abortion of female fetuses. Chapter 3, a joint work with S Anukriti and Sonia Bhalotra investigates their impact on the relative chances of girls surviving after birth, fertility and parental investments. We find that it lead to reduction in excess female mortality, erosion of gender gaps in parental inputs such as breastfeeding and immunization, and moderation of son-stopping fertility. For every five aborted girls, we estimate that roughly one additional girl survives to age five. Our findings have implications that sex-selective abortion not only account for counts of missing girls but also for the later life outcomes of girls.