Abstract This thesis makes three main contributions to the literature on Dynamic Stochastic General Equilibrium (DSGE) models in Macroeconomics. As no previous studies have studied the Chinese economy from the perspective of DSGE, the first contribution of this thesis is estimating a DSGE model for China through a Bayesian approach using the Chinese quarterly post-economic reform data representing the main macro-economic time series 1978.Q1-2007.Q4. Second, this thesis adopts a new method of evaluating macro-economic models in its evaluation of the estimated DSGE model for China. Rather than the classical methods used to evaluate a macro-economic model such as the Maximum Likelihood method, the method of Indirect Inference is used to test the DSGE model. This method differs from other methods in its adoption of a VAR as the auxiliary model that mimics reality. A hybrid model is adopted to improve the ability of the DSGE model to replicate real world results and compared to the original New Keynesian version of the DSGE model developed by Smets and Wouters. Third, considering the restrictions that the prior distribution imposed on the estimated parameters of the model in the Bayesian estimation, the estimation method of Indirect Inference is used in the last chapter of this thesis and compared with the Bayesian estimation. The results of the Bayesian estimation are in agreement with most of the existing literature on DSGE models. However, the results of Indirect Inference testing suggest that the adopted DSGE model does not closely resemble the real data, with a Hybrid model with 50% weight on the NK part performing significantly better. Indirect Inference estimation produces the same results and provides a better estimation of the model.

This thesis contains three chapters. The first two chapters concentrate on the sovereign debt market and study how domestic holdings of government debt and financial intermediation influence yields and equilibrium debt levels. An innovative perspective emerges from these studies: Sovereign default risk and government yields crucially depend on the size of domestic debt and on its influence on the domestic credit market. This perspective surpasses the traditional view that exclusively relates sovereign default risk to the size of external debt and the economic cycle. The third chapter empirically investigates the functioning of international capital markets and the behavior of market participants. The chapter studies how the different return components of aggregate equity and bond markets influence mutual fund flows and vice-versa. Two interesting results emerge. Firstly, the non-contemporaneous correlation between flows and returns is found to be predictable at least in the short run. This result rejects the standard perfect market assumption in macro-models which implies that the correlation between flows and returns is strictly contemporaneous. Secondly, evidence is found that excess returns in the equity markets are driven by cash-flow news. This is in contrast with the typical finding in the literature that discount rates news is the main driver of excess returns. Identifying determinants of government incentives to default is central to understand how equilibrium prices and quantities iare determined in sovereign debt markets. The scholarly literature has focused on two factors to explain default risk: the size of external debt and the fluctuation of the economic cycle. While these two dimensions are certainly important, another aspect seems equally important: the internal versus external composition of debt. Reinhart and Rogoff (2008) empirically investigate the importance of domestic debt for sovereign default episodes and conclude that there is a “forgotten history of domestic debt”. While domestic debt dynamics are relevant to understand sovereign default risk, very little research has been devoted to it. The first chapter of my thesis fills in the gap by incorporating domestic debt in a theoretical model of sovereign default. This extension leads to three contributions. The first is a positive one. While standard sovereign default models (i.e. Arellano, 2008 and Aguiar and Gopinath, 2006) assume exogenous output costs to default, the introduction of domestic debt allows me to illustrate an endogenous mechanism linking defaults and output contractions through the credit market which is consistent with the empirics. The second contributions is quantitative. The introduction of domestic debt helps to reproduce the high debt to GDP ratios and the low frequency of default that is found in the empirics. Finally the last contribution is normative. When domestic investors act competitively domestic debt levels are found to be inefficiently low. A case is made for the introduction of Pigouvian subsidies that subsidize domestic purchases of government debt. Sovereign defaults and banking crises tend to come in pairs. Understanding the link between these two phenomena is relevant to understand how the risk of sovereign default is priced by financial markets. In the second chapter of the thesis I focus on the underlying mechanisms of contagion between public debt and bank’s balance sheet. Using disaggregated banking data I analyze empirically the channels through which sovereign debt crises transmit to the banking sectors. I find that one of the main propagation mechanism operates through the collateral channel. When the default risk is high the price of government debt falls and the value of the asset that banks can pledge as a collateral on the wholesale market for liquidity contracts. Funding difficulties transmit thorough the balance sheet to the credit supply . The cyclicality of credit supply magnifies the negative impact of sovereign debt crises on output and consumption reducing the ex-ante incentives of issuing domestic debt. Lenders of last resort may mitigate the contraction of the credit supply in bad times offering liquidity in exchange for government debt. Following the monetary authority intervention the credit market recovers, sovereign yields fall and higher debt levels become sustainable. The third chapter studies the functioning of international equity and bond markets and the behavior of its participant. The chapter focuses on the interaction between different return components of aggregate equity and portfolio flows. First, international equity and bond market returns are decomposed into changes in expectations of future real cash payments, interest rates, exchange rates, and discount rates. News about future cash flows, rather than discount rates, is the main driver of international stock returns. This evidence is in contrast with the typical results reported only for the US. Inflation news instead is the main driver of international bond returns. Next, the interaction between these return components and international portfolio flows is analyzed. Evidence consistent with price action, short-term trend chasing, and short-run overreaction in the equity market is found. International bond flows to emerging markets are found to be more sensitive to interest rate shocks than equity flows.

I present three essays in this thesis. The first essay investigates the decision of small businesses with respect to an optional Flat Rate Scheme (FRS) in the UK. FRS replaces VAT with a turnover tax providing some traders with a tax saving opportunity. Using the universe of VAT returns between 2004-05 and 2010-11, I find 26 percent of eligible traders have non-negative tax gains from FRS. I show gains are highly persistent and not so small, yet only 3 percent of gainers join the scheme after one year. Temporal and spatial correlations point to information frictions and learning as potential explanatory factors. Results show traders registering after introduction of FRS and those registering in high FRS density areas are more likely to join the scheme. The second essay estimates stimulus effect of the temporary reduction in the standard VAT rate in the UK. From 1 December 2008 to 31 December 2009, the standard-rate was reduced from 17.5 to 15 percent. I use the universe of VAT returns submitted to HMRC between 2002 and 2010q1q4 and compare changes in sales growth of standard-rated traders during the cut to that of zero-rated traders (difference-in-differences). To control for heterogeneous recession effects, I first rely solely on post-recession observations and utilize the fact that the cut and the recession don't fully overlap. Second, I allow for sector specific recession impacts. Both strategies show a small insignificant impact on gross sales and purchases which suggest a proportionate increase in quantity demanded in response to the tax induced price cut. The third essay estimates the impact of Iran Iraq war on educational attainment of children. I use a two percent sample of 2006 Iran Population Census, and compare exposed cohorts in war provinces to unexposed cohorts (difference-indifferences). The estimates suggest probability of finishing high school is respectively reduced by 4.8 and 1.9 percentage points for cohorts exposed to war in early childhood and those exposed during schooling (former significant at 10 percent, latter insignificant). Interestingly, the war impact on early childhood cohorts is robust to controlling for differential linear trends while the impact on school cohorts is not.

This thesis consists of three chapters that fall under the broad banner of contract theory, applied to topics in behavioral and development economics. Empirically, labor contracts that financially penalize failure induce higher effort provision than economically identical contracts presented as paying a bonus for success. This is puzzling, as penalties are infrequently used in practice. The most obvious explanation is selection: loss averse agents are unwilling to accept such contracts. In the first chapter, I formalize and experimentally test this intuition. Surprisingly, I find that workers were 25 percent more likely to accept penalty contracts, with no evidence of adverse selection. Penalty contracts also increased performance on the job by 0.2 standard deviations. Finally, I outline extensions to the basic theory that are consistent with the main results. The second chapter analyzes the effect of market structure in microfinance on borrower welfare and the types of contracts used. We find that market power can have severe implications for borrower welfare, while despite information frictions, competition delivers similar borrower welfare to non-profit lending. We also find that for-profit lenders are less likely to use joint liability than non-profits, which is consistent with some empirical stylized facts suggesting a decline in use of joint liability. We simulate the model to evaluate quantitatively the importance of market structure for borrower welfare. The third chapter contrasts individual liability lending with and without groups to joint liability lending, motivated by an apparent shift away from joint liability lending. We show under what conditions individual liability can deliver welfare improvements over joint liability, conditions that depend on the joint income distribution and social capital. We then show that lower transaction costs that mechanically favor group lending may also encourage the creation of social capital. Finally, we again simulate the model to quantify our welfare conclusions.

This thesis is composed by three essays and applies econometric methods to analyze different economic research questions using microeconomic data. The first essay (chapter 2) analyzes consumer searching behavior in a grocery context. The second essay (chapter 3) studies the implications of the introduction of a bonus scheme in a principal-agent context using data from furniture sales. The third essay (chapter 4) proposes an empirical strategy to estimate the impact that a worsening in banks’ wholesale funding opportunities (such as the Italian sovereign debt crisis of 2011) has on borrowers’ ability to repay their loans. Chapter 5 concludes the thesis and provides some directions for future work. The first essay (chapter 2), written jointly with Stephan Seiler, estimates the effect of time spent searching in a supermarket on consumers’ expenditure. The analysis is implemented using a unique data-set obtained from radio frequency identification tags which are attached to supermarket shopping carts. This allows us to record consumers’ purchases as well as the time they spent in front of the shelf when contemplating which product to buy, giving us a direct measure of search effort. We estimate the effect of extending search on the price consumers pay within a category while controlling for a host of confounding factors such as category-level price variation over time and measurement error. Our results show that an additional minute spent searching lowers category-level expenditure by $1.40. Extending search-time by one standard deviation allows consumers to appropriate 8 percent of the possible category-level price savings. The second essay (chapter 3) uses data on the staff of a furniture firm to show that, when a fixed bonus scheme conditional on revenues was introduced, it increased the revenues generated by all sales employees, but I find no significant heterogeneous effect of the bonus scheme depending on whether the employee is given control over price or not. The essay also shows that giving the sales staff control over price does not significantly increase revenues. The effect of the bonus scheme and of price delegation on gross profits minus paid bonuses, commissions, and wages were similar. These results are robust to a number of checks, and are consistent with a model of moral hazard and price delegation. The effect of the bonus scheme and of price delegation on gross profits minus paid bonuses, commissions, and wages were similar. These results are robust to a number of checks, and are consistent with a model of moral hazard and price delegation. Chapter 5 concludes and discusses the limitations of the current work and provides some directions for future research.

This thesis studies the theory of intermediation in trade problems arising from the allocation of a single indivisible object. Chapter I considers a general trade problem with a single seller and multiple buyers. I analyze a game, where multiple intermediaries compete with each other by designing contracts that determine the terms of trade between the bargaining parties. I show the existence and uniqueness of equilibrium outcomes. Repeating the analysis for the case of a single monopolist intermediary, I compare the equilibrium outcomes and show that allocative efficiency is strictly improved as a result of the competition among intermediaries. Chapter II considers a bilateral trade problem with two-sided asymmetric information where the buyer’s valuation may depend on the private information of both bargaining parties. I analyze the impact of intermediation by a profit-maximizing intermediary in a game, where the seller has the ability to trade directly with the buyer. I provide a necessary and sufficient condition for the equilibrium outcomes with the presence of an intermediary to be strictly more efficient than those that are attainable in its absence. Lastly, in Chapter III, similar to the previous chapter, bilateral trade problems with informational externalities arising from interdependences are considered. I analyze a game, where the seller designs a contract at ex-ante stage before learning his private information. I characterize the optimal mechanisms and show that they attain second-best outcomes. The Pareto optimality of ex-ante contracting in the absence of an intermediary, in turn presents a natural limit to the benefits to be accrued from intermediation.

The thesis contains three essays on the determinants of productivity. The first essay studies how costly supplier contract enforcement shapes firm boundaries, and quantifies the impact of this transaction cost on aggregate productivity and welfare. Contract enforcement costs lead suppliers to underproduce. Thus, firms will perform more of the production process in-house instead of outsourcing it. In countries with slow and costly courts, firms should buy relatively less inputs from sectors whose products are more specific to the buyer - seller relationship. I first present reduced-form evidence for this hypothesis using cross-country regressions. I use microdata on case law from the United States to construct a new measure of relationship specificity by sector-pairs. This allows me to control for productivity differences across countries and sectors and to causally identify the effect of contracting frictions on industry structure. I estimate a model and conduct a series of counterfactual experiments. Setting enforcement costs to US levels would increase real income by an average of 3.6 percent across all countries, and by an average of 10 percent across low-income countries. The second essay investigates the role of bureaucratic startup costs and credit market imperfections in shaping selection, misallocation, and aggregate productivity. We study a dynamic model of misallocation. Limited access to external financing and entry costs mean that firms are not necessarily operated by the most talented managers. We calibrate our model to the United States. Our findings suggest that the reduction of startup costs would only have a small impact on aggregate productivity and welfare. Financial frictions, on the other hand, seem to have a much larger impact. The third essay returns to the role of intermediate inputs for economic performance. Using panel data on manufacturing firms in India, we study the role of input complementarities in shaping the firm’s choice of products. We find that firms are more likely to add products to their portfolio if these products require intermediate inputs that the firm is already using in their production activities. Our findings shed light on the source of firm’s core competencies. We also provide the first study of supply linkages within multiproduct firms in developing countries. We find product turnover rates in India that are comparable to US levels.

My thesis investigates the role of incentives for employees and the phenomenon of labour market hysteresis in driving productivity and employment in the labor market in the UK. Chapter 1 summarizes the thesis. The second chapter estimates the impact of introducing an explicit points-based system in favour of finding jobs for the disabled in a UK job placement agency. Using dynamic analysis, we find that in the long-run the policy improved disabled outflows by 6% and had an insignificant effect on JSA outflows. In the short-run, the policy had a negative impact on JSA outflows that declined by 2%. This is consistent with a model where information helps both groups, but incentives offset this for the able and reinforce it for the disabled. The third chapter studies how incentives are weakened in a public sector organization when rewards are based on team output rather than individual output. With the introduction of team rewards, employees are likely to free-ride on each other’s efforts. I find compelling evidence that this indeed occurs. Peer monitoring, may however, limit free-riding in teams. I formalize the impact under two benchmark models to ascertain the relative impact of peer monitoring and free-riding. Using difference-in-differences estimators, I find that consistent with a degree of peer monitoring, the dilution effect is smaller when peer monitoring is easier. The fourth chapter models the phenomenon of labor market hysteresis in a macroeconomic model to determine its impact on macroeconomic outcomes. In particular, we study its role in determining the impact of the scale and timing of UK’s fiscal consolidation programme on output and unemployment in the UK. Finally, the last chapter studies employee incentives in the context of education. Motivated by a diagnosis of increasing inequality in UK’s educational attainment in secondary education, we recommend a flexible school system and improved school and teacher governance.

Financial crashes, bubbles, panic in the banking industry, currency crises and even sovereign defaults continue to occur periodically. Therefore, when international or multilateral lenders contemplate on lending credit to customers who are located in different countries, they require a meticulous method of analyzing every aspect to select the best customers, amongst numerous credit proposals from different countries. Moreover, while lending to selected customers, multilateral lenders need to take into account and consider the risk premium in their pricing methodology. Even after having selected sound customers, one should not neglect adequate loan loss provisions in order to safeguard themselves against unexpected changes in financial situations of customers. This may result in credit default. Although several credit scoring methodologies exist for calculating the risk of individuals and corporate customers, most of these methodologies are based on default history and there appears to be a lack of an appropriate methodology when faced with minimal credit default history. Usually, financial institutions and very large corporations are characterized by nil or a very low default history. Following this introduction, this dissertation aims to contribute towards these aspects in the form of three self-contained essays. The first chapter is concerned with determining the main factors, which affect the financial health of financial institutions. More specifically, this is undertaken by employing the two-way panel model and data from financial institutions in several Asian countries. The study attempts to determine bank specific and macro level factors affecting the financial soundness of these financial institutions. In the second chapter by following a similar approach of analysis, this study attempts to detect the main determinants of financial health for very large corporations. These corporations are another group of customers for multilateral lenders. In this case, data from very large corporations in Eastern European countries, which are characterized by their in-transition economies, are employed. Considering the dissertation's findings that are supportive of existing literature, the third chapter addresses the design of two credit scoring/rating models employing fuzzy logic methodology and based upon results from previous chapters. The scoring/rating results of the two models are then analyzed in comparison with the Capital Intelligence rating agency and stock exchange market performance results to assess robustness. This proves the relative robustness of our designed models. Overall, this thesis not only combines and investigates topical issues; moreover, it does so employing various techniques with the intention to contribute on the methodological level. The study is concluded by highlighting policy implications by providing direction for future research.

This thesis comprises three essays examining the roles of markets and intrinsic motivation in public organisations. Chapter 1 examines the impact of establishing Independent Sector Treatment Centres in the English National Health Service (NHS) during the 2000s on the performance of neighbouring NHS (public) hospitals. It finds that NHS hospitals that had an ISTC placed nearby became more efficient (measured using pre-surgical length of stay for orthopaedic surgery), but also received sicker patients on average, as ISTCs avoided treating the sickest patients. Average cost per patient at ISTC-exposed NHS hospitals increased, suggesting that any efficiency gains were swamped by the negative effect on costs of worsened patient casemix. Chapter 2 examines the 2006 introduction of patient choice of hospital for elective surgery within the English NHS, using Patient Reported Outcome Measures (PROMs) of health gain from surgery as a measure of hospital quality. The hospital competition brought about by this reform appears to have led to lower varicose vein surgery quality, but no change in groin hernia surgery quality. For orthopaedic surgery quality, the evidence in support of a negative effect of competition outweighs the evidence to the contrary. We explain these findings by explicitly modelling the hospital as a multi-product firm. Chapter 3 examines the rationale for the 2011 Busan Declaration, which states that foreign aid should be given in line with the priorities of recipients, by constructing a model of the interaction between donors and charitable entrepreneurs, where occupational choice is endogenous, donors can choose whether to give, and donors and entrepreneurs are paired in a stable matching. We show that mission conflict in the charitable sector can arise when mission preferences and income earnings ability in the private sector are correlated, and examine policy options to encourage the charitable sector to give greater weight to recipients’ objectives.