This thesis consists of three independent chapters investigating behavioural mechanisms of cooperation and coordination. In particular, chapter 1 analyses a voluntary contribution game and proposes a simple behavioural mechanism to achieve social efficiency. Specifically, in this mechanism, each player can costlessly assign a share of the pie to each of the other players, after observing the contributions, and the final distribution of the pie is determined by these assignments. In a controlled laboratory experiment, I find that participants assign the reward based on others' relative contributions in most cases and that the contribution rates improve substantially and almost immediately with 80 percent of players contribute fully. Chapter 2 studies the effects of costly monitoring and heterogeneous social identities on an equity principle of reward allocation. The investigation is based on the mechanism proposed in chapter 2. I hypothesised that the equity principle may be violated when participants bear a personal cost to monitor others' contributions, or when heterogeneous social identities are present in reward allocations. The experimental results show that almost half of the allocators are willing to sacrifice their own resources to enforce the social norm of equity principle. Likewise, with the presence of heterogeneous social identities, though a few participants give more to their in-group member, the majority of them still follow the equity principle to allocate. Chapter 3 explores the behavioural mechanism of communication and leadership in coordination problems. Specifically, I consider two types of leaders: cheap-talk leaders who suggest an effort level, and first-mover leaders who lead by example. I use experimental methods to show the limits of these two mechanisms in avoiding coordination failure in a challenging minimum effort game, with low benefits of coordination relative to the effort cost. The results suggest that both types of leadership have some ability to increase effort in groups with no history, but are insufficient in groups with a history of low effort.

This dissertation joins a vibrant conversation in macroeconomics about the role of financial frictions in business cycles spurred on by the recent financial crisis. Our proposed study contributes to this lively debate in a fundamental way by putting forward two DSGE models. Firstly, we consider a DSGE model which accounts for the financial sector and assumes a distorted steady state. Unlike in studies where the welfare effects of distinct policy bodies i.e. the central bank and the macroprudential institution are not tracked, in our proposed model we derive welfare-based loss functions that trace associated inefficiencies emerging from both nominal and financial distortions. Therefore, to the best of our knowledge, this model is the first to consider welfare-based mandates to the central bank and the macroprudential institution that targets related inefficiencies. In addition, a key innovation of this model is the use of such welfare-based mandate in a game-theoretical framework. Secondly, we introduce a DSGE model, which in addition to financial frictions, is augmented with stochastic volatility and nominal rigidities. This model is then used to assess the effectiveness of conventional, unconventional monetary policies and macroprudential policies in mitigating the effects of disturbances in the presence of risk shocks. To the best of our knowledge, this second model is the first to analyse the effectiveness of unconventional monetary policy and macroprudential policies with stochastic volatility. Furthermore, another key novelty of our research is the analysis of the interactions between three policy options, namely conventional, unconventional monetary and macroprudential policies.

This dissertation contributes to the analysis of firm heterogeneity, turnover, and worker reallocation in frictional labour markets. Chapter 1 presents empirical evidence using German longitudinal matched employer-employee data on the relationship between worker flows and employer characteristics. In particular, the analysis distinguishes between employer-to-employer reallocations and movements into and out of non-employment. It also documents the relationship between worker movements and establishment wage, size and age. The empirical results constitute a motivation for the following chapters. Chapter 2 analyses equilibrium in a labour market characterised by a stationary growth economy with heterogeneous firms and frictional unemployment. The model extends the Coles and Mortensen (2016) framework in two directions: it introduces vintage effects and endogenous worker search effort. New start-up firms are created with a productivity drawn from a technology frontier which grows over time. However, as a given firm’s productivity is fixed, its quality declines relative to the market average. In addition, workers can choose their search intensity. Chapter 3 provides a quantitative exploration of the theoretical model presented in Chapter 2. It estimates the parameters of the model using simulated minimum distance and evaluates its performance in capturing some features of the data: in particular, the model is able to match the establishment size distribution and the relationship between hires and employment.

This thesis explores the role of inactivity in shaping unemployment fluctuations in frictional labour markets. In the First Chapter, I document several facts on the behaviour of inactive individuals in the United Kingdom using the Labour Force Survey, observing a high degree of heterogeneity within those that are not classified as being part of the labour force population. I analyse the behaviour of marginally attached individuals and those who do not desire to work and their role in explaining labour market fluctuations. Then, I use the results found in the First Chapter as a motivation for the rest of this thesis. In the Second Chapter, I consider a search and matching model where vacancies behave as a stock variable in the spirit of Coles and Moghaddasi (2017). Here, I include an exogenous partic- ipation margin and assume marginally attached search with a non-zero job finding probability. I calibrate and evaluate the performance of the model in generating the behaviour of unemployment and vacancies observed in the data for the UK. Finally, the Third Chapter introduces an endogenous participation decision: in every period non-employed individuals decide whether to look for a job or to be inactive according to the state of the economy. I numerically test how modelling the search choice affects the behaviour of individuals when the economy is hit by productivity and separation shocks.

This thesis is a collection of three essays studying firms in low income countries. The first chapter explores how relational contracts that substitute for formal contracts in the presence of weak institutions, are affected by changes to the outside option of one of the parties. I investigate this question by assessing how a change in the pay-off of cultivating an alternative crop by farmers affects the relationship with downstream buyers in the sugar industry in colonial Taiwan (1895-1945). Using novel historic sugar mill level data, I analyse effects on interlinked lending and the provision of inputs by mills to farmers following a reversal of the downward price trend of the main alternative crop, rice. In the second chapter, which is co-authored with Anna Baiardi, we empirically assess the importance of ethnic networks in facilitating international trade. In particular, we investigate the impact of ethnic Cantonese networks in the United States on the export performance of firms based in Southern China. In the third chapter, I investigate whether the dominance of small firms in developing countries can be explained by the production of customised goods, which allows smaller and less efficient firms to compete with larger and more efficient modern firms. I incorporate this hypothesis in a model, in which the key variables impacting the profitability of the customised technology and thus firm size are transport costs and income.

In the first chapter, I explore the problem of optimal contracting under delegation of information acquisition. I study a model where equity-holders of a fund delegate their portfolio allocation to a fund manager in an environment where: i) the expected return of the implemented portfolio depends on the ex-ante unknown future price of an asset, ii) the manager can acquire costly information about the future price, and iii) information acquisition is unobservable and unverifiable. I characterize the optimal contract which incentivizes the manager to obtain information and take the profit-maximizing position based on the available information. I show that the optimal contract implies a premium for positions against the publicly available information: a long position when an asset is considered overvalued, and vice versa. This premium leads the manager to adopt contrarian positions more often than the first best. I argue that this ‘bias against the flow’ is supported by empirical evidence. In the second chapter, I explore the impact of Credit Rating Agencies (CRAs) on capital markets. I argue that the source for potential inefficiencies arising from CRAs might be more pathological than the literature recognizes; even in the absence of conflicts of interest or other distortions resulting from players’ behavior, a CRA might have an adverse effect on critical economics variables. I develop a model of investment financing which, similarly to capital markets, is characterized by information asymmetry and lack of commitment. In the benchmark setting, the CRA is capable of perfect monitoring and reveals its private information truthfully and without cost. I explore the impact of such an “ideal” CRA on the interest rate and the probabilities of project financing and default. I find that introducing such a CRA may lead to under-financing of projects with a positive net present value (NPV) that would otherwise be financed; a higher expected interest rate; and a higher expected probability of default. These findings relate to the feedback effect, which is inherent in capital markets, and its asymmetric impact on firms of different quality. I evaluate the policy of restricting CRAs to provide hard evidence with their ratings, and suggest that it might have an unfavorable effect on the probabilities of project financing and default. In the third chapter, I explore the problem of security design with endogenous implementation choice. I study an economy where an entrepreneur raises capital to finance an investment project. My focus is on an environment where the entrepreneur shares the same characteristics as the representative entrepreneur in crowdfunding platforms: i) there is no record regarding her ability, ii) she might be associated with a negative-NPV project, and iii) she has limited liability. Asymmetric information regarding the entrepreneur’s ability between the entrepreneur and potential investors gives rise to a signaling game when the former issues securities to raise capital. I characterize the optimal security, and show that it is always optimal to reward the non-implementation of the project after financing takes place. I show that compared to a case where the entrepreneur is obliged to implement the project after raising capital, endogenizing the project implementation choice: i) prevents market breakdown, ii) leads to a more efficient allocation of resources, and iii) strengthens the incentive of an entrepreneur to invest in her productivity.

In this thesis I presented two essays motivated by the observation that financial crises tend to be accompanied by deeper recessions and slower recoveries, partly due to debt burden (e.g. Reinhart & Rogoff, 2009; Hong and Tornell, 2005; Jordà, et al., 2013). In the first essay I evaluate this claim against the contrasting view that magnitude and persistence of recessions is rather the consequence of bigger and more persistent shocks (Stock & Watson, 2012). To do so, I compute recovery and recession paths through the estimation of impulse responses by local projections methods (Jordà, 2005). I found that the occurrence of financial crises is associated with more severe recessions only if the recession itself is big enough. But this effect disappears when the output loss caused by the recession is below the historical average. More importantly, neither the magnitude of the loss, nor the occurrence of financial crises, nor debt accumulation are associated with sluggish output growth during recoveries. It has also being suggested that expectations prior to the crisis help to determine the magnitude and length of recessions following financial crises (Chauvet and Guo, 2003; Cerra and Saxena, 2008). This and the role of pre-crisis dynamics is not properly reflected in standard DSGE models. In the second essay I account for the effect of pre- crisis dynamics and evaluate whether financial crises are different. To do so, I introduce optimism (in the form of unrealised news about capital quality) in an otherwise standard DSGE model with financial frictions. Under this framework, optimism generates investment–debt / boom-bust cycles accompanied by long recessions. I found that within this framework cycles associated with financial and technology news shocks are different regarding the responses of asset prices and banks’ net worth. Real variables respond similarly to unjustified financial or technological optimism.

This thesis consists of three chapters. In the first chapter, I explore a two-period economy with a three-tier hierarchy in which the principal without full commitment decides how and when to motivate a productive intermediary (agent one) to privately sub-contract and collaborate with another agent (agent two) on a project with uncertain quality. The dynamic moral hazard problem arises due to the agents’ hidden effort choice and the opportunity for future work. Besides free riding, the agent one’s exclusion and over-investment incentives need to be considered due to his private sub-contract option. Both the dominant incentive constraint in the optimal short term contract and the principal’s investment decision depend on the project’s value-cost ratio, the level of synergy in the partnership and the amount of patience. In general, the principal under-invests and stops earlier compared to the first-best outcome. However, there exist scenarios in which agent one always over-invests when the individual work is motivated, and the principal might compromise to motivate a higher effort level by over-investing relative to the static game, especially if the synergy is positive but small and the project’s value-cost ratio is medium. In a two-tier hierarchy, the principal can be weakly better off, but the inefficiency caused by agent one’s private link to the other agent still exists. In the second chapter, I study how a principal motivates an uninformed agent to learn about, and reveal, his quality through private experiments. The principal commits to a reward scheme and she aims to assign the rewards to correspond as closely as possible to the quality of the agent. To get a high reward, the agent experiments privately and discloses the results selectively. I show that the optimal reward scheme features an increasing step function: the initial steps encourage a potential good type agent to continue experiments after early successes; the later steps are designed to deter a bad type agent from over-experimentation after a failure, and the scheme becomes flat when enough successes are reported. If the agent’s incentives to deviate from the intended path of experimentation are weak, a one-step function is optimal: the agent receives a bonus if he reports enough successes; otherwise, he only gets a non-negative compensation. I characterise the conditions where the principal achieves the same efficiency level relative to a public information environment. The third chapter is an extension of the second chapter. I consider a situation in which an uninformed agent persuades a principal for a high reward through costly private experimentation. I show the existence of three types of equilibria as well as their conditions: no-experiment equilibrium, separating equilibria with learning and pooling equilibria with learning. The participation threshold determines the upper bound of the entire set of equilibria, and the over-experimentation determines the boundary between the separating and pooling equilibria with learning. As the agent’s value-cost ratio or prior belief increases, the set of separating equilibria with learning shrinks but the set of pooling equilibria with learning expands. Moreover, when the agent can pre-commit to report a specific number of successes to prove his quality, he tends to commit to a number that is as small as possible.

This Thesis contributes to the literature of business cycles driven by agents' beliefs. In Chapter 3, we provide novel empirical evidence linking the effects of technology news shocks to uncertainty shocks. Their correlation implies that when financial uncertainty shocks hit the economy, utilization-adjusted total factor productivity (TFP) increases over the medium-term. This leads to an attenuation of the effects on economic activity from news shocks in the short-term and from uncertainty shocks in the medium- term. Supported by these results, we propose an identification strategy to measure the effects of `good uncertainty' shocks and disentangle the importance of technological news, good and bad uncertainties, and ambiguity shocks in explaining business cycle variation. In Chapter 4, I investigate the empirical relationship between agents' responses to future technological changes and the level of uncertainty in the economy. I show that the economic responses to news shocks change substantially over time, and that this dynamic couples with periods of high and low uncertainty. Periods of high uncertainty are characterized by higher positive economic effects of news shocks on output, consumption, investment and real personal income. These results indicate that the continuous updating of agents' expectations about the current and future economic situation operates as a transmission channel for news shocks, amplifying its positive outcomes. Kurmann and Otrok [2013] show that the effects on economic activity from news on future productivity growth are similar to the effects from unexpected changes in the slope of the yield curve. In Chapter 5, I show that these results do not hold in the light of a recent update in the utilization-adjusted TFP series produced by Fernald [2014]. In Chapter 6, I propose a novel method of identifying technological news shocks through instrumental variables based on forecast revisions from the Survey of Professional Forecasters. I construct proxy measures for the slope of the long-run trend of GDP, investment and industrial production, which are strong instruments for recovering the underlying news shock. The procedure has the advantage of relying on information about agents' expectations, instead of the statistical procedures currently used for the news shock identification. By employing a proxy SVAR, I show that news shocks produce substantial effects on impact on GDP and investment. The effects on consumption in the short-run, however, are milder than usually presented by the news shock literature.

In this thesis we derive exact discrete time representation models that correspond to cointegrated systems in continuous time. At the same time, for the parameters of those models, estimation procedures are outlined. The representations are applicable for data observed as both stock or flow variables and with the use of some simulated data, the performance of the estimation procedure is assessed. More importantly, with the aim of analysing the costs, if there are any, of ignoring aggregation in the specification, the results of our estimation procedure are also compared with the ones we would have obtained by applying instead Johansen’s estimation methodology. In the first part (Chapter 2), we detail the analysis for a first- order stochastic differential equation system, as a result, baseline finding are outlined. In the second part (Chapter 3) the analysis is generalized and not only includes higher order specifications in the system but also incorporates deterministic components on it. Finally, in the last part (Chapter 4) of this thesis, three applications of that estimation procedure are presented. In the results, when the system is entirely comprised by stock variables and the specification follows a first order system, both Johansen’s methodology and ours perform very well, with virtually identical estimates and, for the simulated data, improvements as the sample size increases. However, when the variables of interest are flows or the specification follows a higher order system, given that our exact discrete time representation includes moving average components in the error term, Johansen’s estimates show a persistent bias in estimation, consequently, they reflected the cost of ignoring aggregation in the specification.