Understanding firm behavior is key to understand the process of economic development. Firm choices affect labor market outcomes and the economy’s ability to increase productivity and living standards. In this dissertation, I study two important aspects of firm behavior: technological upgrading and exporting. In the first chapter, I analyze the role of adoption costs and technological complementarities in the process of managerial upgrading, and propose a feasible way to promote the adoption of better management practices by firms. Using a regression discontinuity strategy, I show that a subsidy to certify process standards, such as ISO 9001, increases certification probability and, additionally, induces the adoption of modern management practices that are beyond the standards’ scope. The managerial improvement is concentrated in monitoring and target-setting practices, while no change is detected in practices related to incentives for employees. These findings are consistent with a model in which process documentation, which is required by the standards, and modern management practices are complementary and suggest that subsidizing the certification of process standards is a feasible way to improve management. While the first chapter focuses on the adoption of an already known technology, the second chapter is concerned with the capacity of R&D subsidies to induce the adoption of new technologies in companies. Despite their popularity, there is little evidence of the effect R&D subsidies on the adoption of new technologies by companies. Using a regression discontinuity strategy, I show that an R&D subsidy program in Peru was not able to induce the adoption of new products and processes by beneficiary firms. Qualitative evidence suggests that the main obstacles were not the technical challenges of developing the new technologies, but their implementation. Together with the results presented in the first chapter, these findings suggest that firms’ lack of capacity to handle complex projects might be an important barrier for the success of policy interventions to promote technological upgrading. In the third chapter, co-authored with Judith A. Frías, David S. Kaplan, and Eric Verhoogen, we explore the impact of exports on wage premia. There is evidence showing that exporting firms pay higher average wages. However, it is still unclear whether these results are due to to changes in the wage premia or changes in workforce composition. In our study, we use employer-employee and longitudinal plant data from Mexico to address this question. We do so by decomposing plant-level average wages into a component reflecting wage premia and a component reflecting workers’ skill composition. Using the late-1994 peso devaluation interacted with initial plant size as a source of exogenous variation in exports, we find that exports have a significant positive effect on wage premia, and that the effect on wage premia accounts for essentially all of the medium-term effect of exporting on plant-average wages.

This dissertation contains four essays in spatial and international economics. Chapter 1 investigates how housing variety varies across space. Housing costs are key in understanding real income differences across space and time. Standard measures of housing costs do not account for availability differences, where some housing varieties are available in certain cities or time periods but not others. When households have idiosyncratic preferences over housing units, the set of available housing varieties in a city matters. This paper develops theoretically-founded housing price indices to measure housing costs that account for availability differences. To allow for flexible substitution patterns, I propose a method to jointly estimate the nests that varieties belong to and the elasticity of substitution across varieties within each nest. I find that households in larger cities benefit from having access to varieties not available in smaller cities. Utility-consistent housing prices reduce the elasticity of housing prices with respect to population by a half. Since housing is a third of household expenditure, this implies that we have systematically underestimated real income and overestimated residual amenities in larger cities. In contrast to previous estimates, I find that real income is increasing in city size after accounting for availability differences. Chapter 2 investigates the factors that cause incomplete pass-through of exchange rate shocks into border prices. This paper examines the role of decreasing returns to scale, a channel that has received limited empirical and theoretical attention. Based on a first-order approximation to a firm's optimal price, I show that 1) decreasing returns to scale interacts with variable markups, imported inputs, and destination non-traded costs to generate incomplete pass-through, 2) there is asymmetry between importer currency and exporter currency shocks due to imported inputs, and 3) strategic complementarity matters, where firms adjust their prices in response to competitor prices. I propose a new estimation method for key demand and supply parameters that govern the degree of markup and marginal cost adjustments. Using the estimated parameters, I find that decreasing returns to scale is the dominant factor in generating incomplete pass-through, with variable marginal costs contributing to over 90% of the incomplete pass-through, while variable markups account for less than 10%. Chapter 3 analyzes the determinants of exporter size. Theories of comparative advantage and product differentiation have emphasized productivity and quality differences. This paper shows that incorporating decreasing returns to scale matters for understanding the determinants of exporter size. Exogenous marginal cost differences affect equilibrium quantities but do not necessarily appear in prices since lower exogenous marginal costs (a lower cost curve) are offset by higher endogenous marginal costs (movement along the cost curve). As a result, standard approaches that assume constant returns to scale underestimate the contribution of marginal cost differences and overestimate the contribution of quality differences. Based on bilateral trade flow data between 1997 to 2016 for over 200 countries and 3000 products, I find that standard approaches attribute almost no variation in exporter size to cost differences. In contrast, after incorporating decreasing returns to scale, I estimate that 58% (65%) of the variation in exporter size is attributed to fundamental cost differences in the time series (cross-section). Chapter 4 models and quantifies the dynamic gains from exporting. I develop a dynamic trade model where firms innovate and learn from other firms in the destinations they sell to. The evolution of a country's stock of knowledge can be expressed as a function of export flows and the stocks of knowledge of their trading partners. I find evidence that countries in Asia, North America, and Europe, as well as countries in the top two quartiles of TFP growth were able to better absorb foreign insights than other countries. I evaluate whether there are dynamic gains from trade with two counterfactual exercises. First, I measure the impact of changing trade costs between 1962 and 2000. I find small static gains but zero dynamic gains for the world economy. Second, I quantify the dynamic gains from export-induced foreign knowledge flows by simulating a counterfactual where there is no learning from foreign sources. I find that domestic learning compensates for foreign learning: there are large dynamic gains from exporting when there is no domestic learning and small dynamic gains when there is domestic learning.