| dc.description.abstract | The thesis comprises three chapters studying industrial policy, misallocation and macroeconomic propagation in developing countries. The first chapter studies the impact of placebased industrial policies on equilibrium selection with Indian industrial parks as the empirical context. The second and third chapters study firm networks in Chile and Turkey respectively— using a common theoretical framework, the former studies the incidence of distortions while the latter studies the propagation of a large refugee shock. The first chapter introduces a method to study the impact of policy events on equilibrium selection in settings where strong complementarities may lead to multiple equilibria and coordination failures. Many industrial policies are rooted in the idea of coordination failures and big-push’ theories, yet empirical evidence on their effectiveness remains limited, since distinguishing equilibrium shifts from direct changes in fundamentals is challenging. Leveraging tools from industrial organization and algebraic geometry, I develop an approach to study coordination effects without imposing strong assumptions on the distribution or responsiveness of economic fundamentals. The method identifies the ‘types’ of factual and counterfactual equilibria through a three-step procedure: model estimation and inversion, equilibrium enumeration, and type assignment. Types of factual equilibria may be used to examine how events, like urban infrastructure, subsidy drives, or trade liberalization, affect equilibrium selection. Types of counterfactual equilibria further allow decomposition of observed effects into fundamentals- versus coordination-driven. I apply this method to study industrial zones in India. Using a newly assembled dataset, I find that municipalities receiving an industrial zone see a 60% increase in non-farm employment over 15 years, with significant spillovers to non-targeted sectors and municipalities. Combining the methodology with event study designs, I find that industrial zones increase the probability of escaping a low-industrialization equilibrium by 38%, with coordination effects explaining roughly onethird of the observed change in outcomes. The second chapter (joint with David Atkin, Baptiste Bernadac, Dave Donaldson, and Federico Huneeus) combines unique datasets from Chile to quantify the full incidence of distortions for the first time. Economic distortions—such as market power, taxes, credit constraints, etc.—are fundamental in understanding the difference between developing and developed economies. Recent work has documented the pervasive extent of economic distortions and how they lead to substantial misallocation, or aggregate productivity loss. Far less well understood is how these phenomena affect members of society differently. We embed a new dataset which we build by linking workers and owners to firms, firms to each other, firms to consumers, and firms and consumers to the government, inside a general equilibrium model of the Chilean economy. Armed with internal estimates of distortions on exchanges throughout the economy, as well as data on the network of such linkages, we conduct a series of counterfactual simulations that illuminate the incidence of distortions in our model economy. We find that the burden of distortions falls relatively more on the shoulders of the poor, the young and women. The final chapter (joint with Ahmet Gulek) investigates how immigration-induced wage shocks can propagate beyond the regions receiving immigrants through the production network. Using the Syrian refugee crisis in Turkey as a quasi-experiment and the near universe of domestic firm-to-firm transaction data from VAT records, we show that the immigration shock propagates both forward and backward along the supply chain. Firms in non-host regions who directly or indirectly buy from host regions demand more labor. Firms who sell to host regions weakly increase their sales. Estimates imply an elasticity of substitution between labor and intermediate goods of 0.76 and an elasticity of substitution of nearly 1 between intermediates. Counterfactual analyses show that the spillover effects on non-host regions are economically meaningful when the host regions are central nodes of the domestic trade network. For example, a 1% increase in labor supply in Istanbul decreases real wages in Istanbul by 0.56% and increases real wages in the average non-host city by 0.38%. | |
