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The analysis of the effects of heterogeneity on aggregate economic outcomes has seen a resurgence in the recent macroeconomic literature. The exponential increase in computer power over the last decades has allowed researchers to solve ever more complex theoretical models with meaningful heterogeneity along various dimensions, while at the same time bringing ever more granular microlevel data to the table when testing the model predictions. This thesis explores two varieties of this recent vintage of models of heterogeneity. The first part of the thesis investigates the implications for wealth distributions of combining the standard lifecycle incomplete markets model of household consumption with income processes featuring heterogeneity in individual-specific growth rates, which households can learn about over the course of their working life. To this extent, first the recent literature on partial insurance and models of wealth inequality is reviewed. Then, income processes with profile heterogeneity are estimated from PSID and BHPS data. The results confirm the findings of previous studies that allowing for profile heterogeneity significantly lowers the estimated persistence and innovation variance of persistent shocks to household income, and documents substantial variation in the estimated parameters of the income process across time periods and measures of household income. The estimated income processes obtained are then used in a quantitative model of household consumption and saving in order to investigate the implications for the model predictions on the wealth distribution. The model is calibrated to empirical wealth distributions obtained from the SCF and the BHPS, and it is shown that the inclusion of individual-specific growth rate heterogeneity in income severely deteriorates the model's ability to fit the shape of the data. Comparative statics exercises are performed to identify the drivers in the model's failure to match the empirical profile of wealth holdings, which show that it is precisely the two key parameters which differ between the standard AR(1) model and the heterogeneous profile model, the persistence and variance of the permanent shock to household income, which drive model fit. The second part of the thesis looks at heterogeneity on the production side of the economy and its implications for international trade. Following an existing approach in the literature, we develop testable implications of the Melitz and Ottaviano (2008) model of trade, in which firms differ in their productivity and have to make production and exporting decisions in the face of costs to trade. Applying an estimation strategy previously used in the literature, we find weak support of the model's predictions in data for 64 manufacturing industries in the NAFTA member countries Canada, Mexico and USA. We then test additional model predictions by constructing a measure of entry conditions by industry based on firm turnover, which allows us to divide our sample into fixed and free entry industries. Furthermore, we include the effects of third country tariff barriers on the relative performance of two trading partners' industries. While the results are broadly in line with model predictions, we find some evidence of violations of the predictions in the data.

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Thesis advisor: Zhijie Xiao / This dissertation covers three essays in the realm of investor heterogeneity. Traditional financial economics theories assume that agents are identical. However, daily practice of finance exhibits phenomena that cannot be explained in the context of homogeneous agents. Thus behavioral economists relax the agent homogeneity assumption and allow different types of agents to interplay, which can explain a series of phenomena, including bubbles (Scheinkman and Xiong, 2003,etc), among others. The first chapter of this dissertation answers the question: what kind of investors flock to an IPO--mostly sophisticated or mostly naive? The answer to this question points to explaining the puzzlingly extreme trading volume on the first day after an IPO. Existing explanations rely on institutions such as day trading, short selling and inter-dealer trades, yet IPO frenzies are common even when these are entirely absent. Recent evidence points to the possible importance of sentiment from retail investors, but it is not yet clear what kind of retail investors might be harboring these emotions. I access a unique data set for Chinese IPOs that measures investor experience and trading records. I find that inexperienced investors are initially drawn to the IPO while established investors remain on the sidelines. Over time, investor composition shifts in favor of experienced investors. More importantly, I identify market timing of purchase (together with the timing of selling, the purchase price, etc, which I define as the decision bundle) as the predominant channel for determining heterogeneity in returns for experienced versus for inexperienced investors. Furthermore, I find that investors do learn to be more patient and get better investment performance thereof. Also, I am able to depict the learning curve by documenting that the marginal effect of learning varies across the level of stock of experience, and across heterogeneous investor type. The second chapter examines the effect of short selling via the unique setting in the Hong Kong stock market and find that, when a stock becomes shortable, its trading activities decrease, liquidities worsen, and information asymmetries increase. This finding contradicts both the existing theoretical models, and recent empirical studies using global financial crisis data. We extend the sequential trading model with short-sales constraints of one asset by Diamond and Verrecchia (1987) to the case of multiple assets. The model predicts that our empirical results are due to uninformed traders switching their tradings to non-shortable securities. Chapter 3 uses a unique short selling setting in Hong Kong stock market, and tests the Chen and Singal (2003) hypothesis that speculative short sellers add to the selling pressure on Mondays and hence add to the weekend effect. We document that, first, the weekend effect exists in Hong Kong stock market, regardless of the existence of short sale constraints; second, after introducing short selling, the individual stocks face more significant weekend effect. The reported result is robust over different estimation models, and over different choices of control groups. Our findings strongly support the Chen and Singal (2003) hypothesis. / Thesis (PhD) — Boston College, 2014. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.