Essays on production and investment

This dissertation contributes to the understanding of production and investment decisions under different circumstances. Specifically, it focuses on two aspects: (1) in a market with financial frictions, how entrepreneurs choose their production sectors and finance their business; (2) in a market with spillovers in research and development (R&D), how spillover effect influences firms’ R&D investment and other market performances.

In Chapter 1, I examine how financial frictions affect occupational shifts and structural transformations between the service sector and the manufacturing sector. I construct a general equilibrium occupational choice model with intermediation costs and contract enforcement, in which agents can choose to be entrepreneurs in the service or manufacturing sector, or to be workers. The model is calibrated to match Chinese statistics and is used to conduct policy experiments that vary intermediation and enforcement costs. I find that high intermediation costs cause the contribution to output and the number of workers employed in the service sector to increase. They also decrease output per capita in the service sector. The service sector size and enforcement do not have a monotonic relationship; the association is positive when enforcement cost is sufficiently high and it is negative when enforcement cost is sufficiently low. Counterfactual experiments are performed for the U.S., Brazil and the Philippines. I find that intermediation costs and enforcement can explain almost half of the sector size gap with Brazil and the Philippines.

In Chapter 2, we consider a one-stage Cournot duopoly of R&D. We characterize the Nash equilibrium of the one-stage game and provide a comparison with the two-stage version of the same Cournot model of R&D/product market competition. We look at R&D expenditures, profits, output, and welfare. Under perfect symmetry, the one-stage model always leads to higher profits when the spillover parameter is not equal to 1/2. Moreover, the one-stage model implies more R&D expenditure and higher welfare if and only if the spillover parameter is greater than 1/2.

In Chapter 3, we consider a one-stage Cournot duopoly with R&D and spillovers in R&D inputs and makes a comparison with the two-stage game version where R&D levels are observed before the output choices. We focus on the possibility of a prisoner’s dilemma in R&D. By adding an initial period to our one-stage model, wherein firms decide whether or not to conduct R&D, we find that there is no prisoner’s dilemma in R&D regardless of the level of spillover effects.