This dissertation contributes towards the understanding of the macroeconomic effects of micro-level firm dynamics, in particular firm entry, exit, and innovation activities in driving aggregate economic dynamism and growth. It focuses on the frictions affecting firms in these activities when contracting with their managers and workers, as well as peers, and the corrective role policies can play. The dissertation consists of two chapters.

The first chapter, “Restrictions on Executive Mobility and Reallocation: The Aggregate Effect of Non-Competition Contracts”, assesses the aggregate effect of non-competition employment contracts, agreements that exclude employees from joining competing firms for a duration of time, in the managerial labor market. These contracts encourage firm investment but restrict manager mobility. To explore this tradeoff, I develop a dynamic contracting model in which firms use non-competition to enforce buyout payment when their managers are poached, ultimately extracting rent from outside firms. Such rent extraction encourages initial employing firms to undertake more investment, as they partially capture the external payoff, but distorts manager allocation. I show that the privately-optimal contract over-extracts rent by setting an excessively long non-competition duration. Therefore, restrictions on non-competition can improve efficiency. To quantitatively evaluate the theory, I assemble a new dataset on non-competition contracts for executives in U.S. public firms. Using the contract data, I find that executives under non-competition are associated with a lower separation rate and higher firm investment. I also provide new empirical evidence consistent with non-competition reducing wage-backloading in the model. The calibrated model suggests that the optimal restriction on non-competition duration is close to banning non-competition.

The second chapter, “Knowledge Creation and Diffusion with Limited Appropriation” (joint with Hugo Hopenhayn), studies the interaction of innovation and imitation in driving economic growth. In relation to a series of recent papers in the macro literature have emphasized the interaction between the two forces, we introduce two key elements in considering the incentives to innovate versus imitate. First, we consider frictions in matching innovators and imitators in the process of knowledge diffusion. Second, while most of the recent literature assume that imitators capture the entire surplus from knowledge diffusion, we consider a general bargaining problem between the innovators and imitators in dividing surplus. In a simple one period model, we derive a Hosios condition for the optimal surplus division when firms are ex-ante homogeneous. But we also find that as the degree of firm heterogeneity increases, innovators' share of surplus must decrease to maximize growth, approaching zero for sufficiently large heterogeneity. Our calibrated dynamic model suggests that the optimal share of surplus innovators appropriate should be at the lower end, consistent with weak intellectual property rights.

The dissertation consists of three essays on industrial organization with a particular focus on the structures of financial markets.

The first chapter theoretically studies how search friction affects competition and resource allocation in crowdfunding loan markets, which are described using a many-to-one matching framework. Namely, competitive fundraisers must accumulate multiple investors to complete a transaction. I develop a dynamic matching model with a fixed sample search, a la Burdett and Judd (1983), in which fundraisers compete in interest rates while investors look for good investment targets. I highlight two important economic forces in the model. First, investors can only observe a limited number of quotes. Second, a surplus cannot be created until a fundraiser attracts contributions from enough investors. I show that in the presence of search friction, fundraisers implement mixed strategies to set interest rates in a unique stationary equilibrium, which results in rate dispersion even if the goods are homogeneous. Regarding resource allocation, I show that in the many-to-one market, rate dispersion creates an endogenous coordination mechanism among anonymous and independent investors, thereby making it easy for them to concentrate their investments. In other words, search friction improves allocation efficiency in a crowdfunding market compared with its perfect competition counterpart.

Based on the theoretical framework constructed in the first chapter, the second chapter empirically studies the market structure of the crowdfunding market. I construct a novel data set based on a large panel of fundraisers' behaviors. Using reduced form analysis, I find evidence of persistent rate dispersion and funding mismatches, which are consistent with the theoretical predictions of the search model. I also show that the model is identifiable and can be estimated using a non-parametric approach, which allows me to measure the allocation efficiency. Regarding methodology, I demonstrate that it is sufficient to use projects' ranks to recover search friction primitives, which reduces the computational burden and increases the precision.

The third chapter studies how the combination of adverse selection and moral hazard affects the design of financial contracts. Specifically, the chapter studies an optimal mechanism design problem,a la Mussa and Rosen (1978), in the presence of limited enforcement. In the study, the bank (principal) designs loan contracts to screen firms (agents) with unobserved productivities. Meanwhile, the bank cannot prevent the firm from consuming acquired funds without producing anything. The impediment of forming contracts creates an endogenous outside option for all borrowers. I show that in the optimal mechanism, loan sizes for higher types are decreased by ironing, i.e., by pooling on the top. In addition, the lower types produce at the second-best level. Moreover, I show that firms' participation is independent of the enforcement level.

After a decade of structural reforms, unemployment rates have tripled in Argentina. This paper is concerned with the measurement of unemployment risk and its distribution. We show the importance of considering re-incidence in the measurement of risk and develop a methodology. Our estimates for Argentina show that, though the typical unemployment spell is short, once re-incidence is taken into account, unemployment risk is high, has risen substantially in the last decade and is shared very unequally in the labor force. This counters the established view that unemployment is a small risk, short-duration phenomenon, which arises when re-incidence is not considered.

Macroeconomic models are often estimated with aggregate data, aligning the aggregated behavior of firms and households in models to the data. However, using aggregate data alone can overlook important details of firm behavior that are crucial for understanding issues in macroeconomics. In this dissertation, I use data on firms at the micro-level to more accurately capture firms behavior and their interactions with one another. This approach is applied to answer questions that relate to the monetary policy transmission mechanism, economic growth from new entrants and welfare gains from new technology.

A substantial literature exists which suggests that imperfect information across firms is capable of generating large monetary non-neutralities. In Chapter One, the level of imperfect information is taken from micro-data and used to discipline a standard menu cost model augmented with information frictions. In the model, imperfect information has a negligible effect and real responses to a monetary shock are small and transient in contrast to the bulk of the imperfect information literature. The selection effect dominates the effects of imperfect information as the level of dispersion in inflation expectations in the data is tiny. This result still holds even when the level of dispersion is set to that of the maximal observed levels of dispersion.

Chapter Two presents data that suggests new entering establishments compete for customers, rather than inputs in order to grow. Consistent with the data, I present a model where customers satisfice in forming relationships with establishments in the presence of search frictions. The extent of these search frictions is a new margin that affects selection and allocative efficiency. As search becomes less random and more directed, customers are less willing to satisfice, improving allocative efficiency and inducing exit of slower growing firms. When search frictions in product markets are increased to match establishment dynamics in Chile, output falls by roughly 14 per cent relative to the model calibrated to the US, reflecting decreased allocative efficiency.

Chapter Three studies the impact of online retail on aggregate welfare. I develop a new measure of store level retail productivity and with a spatial model, calculate each store's equilibrium response to increased competitive pressure from online retailers. From counterfactual exercises mimicking improvements in shipping and increased internet access, I estimate that improvements in online retail increased aggregate welfare from retail activities by 13.4 per cent. Roughly two-thirds of the increase can be attributed to welfare improvements holding fixed market shares, with the remainder due to reallocation. Surprisingly, 8.2 percent of firms actually benefit as they absorb market share from closed stores. Finally, I estimate that the proposed Marketplace Fairness Act would claw back roughly one-third of sales that would otherwise have gone to online retailers between 2007-12.

This collection of essays considers three cases where two firms innovate in an imperfectly competitive market. In the first chapter, I introduce a novel model that represents the vertically differentiated industry, wherein the leader and the follower innovate continuously. I uncover the determinants of the innovation of firms, focusing on the ratio between the quality levels of their products, a key factor in deciding to innovate. Firms innovate to receive more profits from higher quality. Moreover, they choose the effort of innovation to widen the distance between the quality of two products. Consequently, firms tend to keep the distance of the quality constant. The second chapter extends the model in the first chapter, adding radical improvement to the quality by innovation, leapfrogging. I show that two firms are likely to innovate actively with the possibility of leapfrogging. The momentum of leapfrogging is powerful when the quality of two firms is similar to each other and when the possible size of the jump from the innovation is larger. Finally, in the last chapter, I introduce the model with the dynamic innovation of firms, which produces complementary goods: the platform and the software. This model focuses on the software innovation induced by the innovation of the platform. I uncover the determinants of innovation for the platform firm and the software firm as well as the interdependence of the two firms' innovation choices.

In the following essays I study the determinants of firms' incentives to innovate and voluntarily transfer knowledge to other firms.

Technology licensing and inventor job transitions are two examples of knowledge diffusion that takes place voluntarily between firms in a market. In this context, the incidence of transfer will depend on product market competition. I ask how changes in intellectual property policies affect voluntary knowledge transfer and innovation across different degrees of product substitutability. I also investigate the empirical relationship between the incidence of knowledge transfer and substitutability.

In the first chapter, I use a two-stage duopoly game of innovation and knowledge transfer to show that innovator bargaining power determines the relationship of innovation to the substitutability of the competitors' products. In particular, innovation increases in substitutability when the innovator's bargaining power is low. In such a situation, the model predicts that the incidence of knowledge transfer will first rise and then fall as a function of substitutability. I show that these results hold in an environment of nested CES demand and price competition.

In the second chapter, I find that the predicted non-monotonic pattern of knowledge transfer holds empirically between pairs of firms. A rising-then-falling relationship exists in the incidence of both technology licensing deals and inventor job transitions as a function of firms' bilateral product market overlap. I find this relationship between knowledge transfer and market overlap after controlling for bilateral technological overlap. This finding isolates the strategic competitive determinants of knowledge transfer and shows that they are economically significant. The results also constitute indirect evidence for the existence of compensation mechanisms that internalize the knowledge spillovers from R&D worker job mobility.

In the third chapter, I find that an infinite-horizon dynamic duopoly game confirms the non-monotonic empirical pattern at low innovator bargaining power. I use the dynamic model to show that greater bargaining power positively impacts the output growth rate through increased innovation. However, raising the bargaining power also generates a countervailing shift away from neck and neck innovation; this shift has a negative impact on growth and the net result is ambiguous.

This dissertation contains two essays exploring the avenues through which economies can experience gains in aggregate productivity, a primary determinant of economic growth and welfare. The first essay investigates the role of mergers and acquisitions in redistributing resources across firms and the resulting impact on aggregate economic performance. The second essay investigates the relationship between market structure, innovation, and achieved firm performance, assessing in particular the role of competitive pressure in stimulating innovation activities and gains in economic performance.

This dissertation consists of three essays on Applied Microeconomic Theory.

The first chapter studies investment incentives in a dynamic random search environment where a seller can make unobservable and selfish investments to reduce his production cost before searching for buyers. In the unique steady state equilibrium, although sellers make positive investments, equilibrium payoffs and the social welfare are a) constant given any search friction and b) equal to the values that would be created if there were no investment. These results hold even in the limit, with the investment strategy converges to the first best and the stationary investment distribution converges to a point mass at no investment.

The second chapter demonstrates how sorting conditions change in search frictions, in a dynamic random matching environment where heterogeneous buyers have private types and heterogeneous sellers make take-it-or-leave-it offers. We first establish the existence of

steady-state equilibrium and then characterize sorting conditions under two extreme

search frictions. Positive (negative) assortative matching requires the production function to be log-supermodular (log-submodular) with maximal search frictions. When search frictions vanish, the condition for

positive (negative) sorting returns to supermodularity (submodularity).

The last chapter examines how patents influence firms' allocation of resources over a portfolio of projects with different non-obviousness. We consider the situation where two identical firms have the replicas of two projects. One is known to be good and the other is risky but is more innovative conditional on being good. Compared to the allocation of resources without any patent, the total amount of resources allocated on the risky project is more efficient. However, the competition for the patent of the safe project also induces firms to inefficiently delay experimenting the risky project. Overall, the welfare effect of patents might be negative.

The mechanism of innovation is an important question in economics. Recent release of the patent transaction data provides some new insights in understanding the innovation process.

Chapter 1 studies the patent reassignment, which is an important phenomenon in the United States. This chapter documents some basic facts about patent transactions on which patents are traded and how they are traded. I also provide evidence on the motive and impact behind these transactions. There is more strategic knowledge flow across firms associated with mergers and acquisitions.

Chapter 2 further investigates the information flow among agents in the economy and how this affects the economic growth. This chapter studies technology diffusion in a heterogeneous agent environment. Agents can improve through imitation or innovation. The benefits of imitation was determined by the economy’s distribution which evolutes over the time. I estimated the model by linking patent citations to imitation process. I provide suggestive evidence on relative contribution of imitation vs. innovation to the economic growth. I also explained the non monotone relationship between patent citations and its value documented recently.

Chapter 2 develops a general method in studying the economic meaning in the cross- section distribution of economic variables. Chapter 3 applies this method to study the income wealth distribution in US. I present some evidence on the contribution of the income

process to wealth inequality using a continuous time Aiyagari type model. I then estimate the

model semi/nonparametrically with the US data. The results suggest that higher moments of the income process is important in explaining the income wealth distribution.

The essays included in this dissertation analyze three policy issues that have been frequently discussed in recent years. Chapter One analyzes the effects and likelihood of a particular type of manipulation with which the Federal Energy Regulatory Commission has become increasingly concerned and illustrates a potential screen for such manipulation. Chapter Two analyzes the effect a federal climate policy might have given the many state climate policies that are already in place. Finally, Chapter Three examines whether it is economically justified to encourage investment in energy storage (instead of flexible natural gas generation) to compensate for the increasing variability in wind generation.