Dissertation

Essays on the Interaction Between Microeconomic Heterogeneity and Macroeconomic Dynamics

Carter, Michael James

2023

Overview

In these essays, I explore the role of microeconomic heterogeneity on understanding macroeconomic dynamics. Specifically, I seek to examine how shareholder preference distributions shape corporate firm behavior, and how that corporate investment behavior trickles up to aggregate outcomes. In the first chapter, I address the question, “Does household wealth and income inequality influence the decision-making of corporate firms?”. I study a DSGE model featuring aggregate risk, incomplete markets, households that vary in labor income and wealth, and shareholder-owned firms. With household heterogeneity and incomplete markets, shareholder value is not well defined. I resolve this classic problem with a mutual fund that holds the production firms and a private equity sector that forces producers to maximize their net market value (or cum-dividend share price). These intermediaries identify the equilibrium market stochastic discount factor (SDF) as a function of the wealth distribution. My model features endogenous stock market trade and a discount factor derived from equilibrium outcomes, which is unique in this class of models. I use this model to study the interaction between firm behavior and different types of household inequality. I find the increase in household earnings risk observed from 1970 to 2010 causes firms to accumulate more capital, lowering consumption volatility, and explaining 55 percent of the observed decline in dividend yields. I then examine the role of wealth inequality through unanticipated redistribution shocks. More inequality leads to higher investment, wages, and output, though at a significant welfare cost to poor households.In the second chapter, I examine the role of common ownership in shaping aggregate outcomes in a riskless environment. Recent research in Industrial Organization and Finance suggests that shareholders who own large stakes in competing firms can cause those firms to compete less vigorously with each other. This concept, referred to as “common ownership,” suggests that firms maximize weighted portfolio value rather than maximizing individual profit. I embed this theory into a dynamic model to demonstrate how observed empirical increases in ownership concentration can partially explain the secular decrease in payments to labor as a share of output. Increases in common shareholding decrease incentives to invest, increase markups, increase profits, and reduce payments to factors of production. While this is a simplified toy model, it suggests that a well calibrated full model could serve as a useful laboratory for policy experiments related to corporate ownership.In the final chapter, I expand the previous exogenous common ownership model along two fronts. The first extension is switching to a multi-sector final goods aggregation method that imposes more realistic markup behavior as common ownership increases. The second extension involves endogenizing the common ownership parameter. This sets the stage for future research that can allow for examining a transition path between different shareholding states. My initial results suggest that common ownership increases output by nearly 10% and aggregate consumption by 7% due to the increasing return to capital associated with higher markups.

• Publisher: ProQuest Dissertations & Theses
• Subject: Economics / Home economics / Labor economics
• ISBN: 9798380589185