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.