| The first chapter of this dissertation analyzes the role of firms' entry and exit decisions in propagating shocks over the business cycle and in generating endogenous expectations-driven fluctuations in the economy. I build a model in which net business formation is endogenously procyclical. The variations in the number of operating firms lead to endogenous countercyclical variations in the markup level along the cycle. This process delivers a powerful internal magnification mechanism of technology shocks. This result supports the view that a potentially significant fraction of the movements in the Solow residual is a result of firms' entry and exit dynamics, through their effect on firms' markups. I continue by establishing the existence of sunspot equilibria. That is, the interaction between net business formation and variations in expectations may function as a source driving endogenous fluctuations in output. Calibrating the sunspots model, I find it captures many key empirical regularities characterizing the U.S. business cycle.; Building on Chapter one, I analyze in the second chapter the effects of a tax reform in the presence of varying monopoly power. Calibrating the model to the U.S., I find that the interaction between business formation and variation in markups magnifies the welfare benefits of a tax reform relative to a perfect competition model and to a constant monopoly power model by one hundred percent and by thirty percent respectively. This result is an artifact of the fall in the markup induced by the entry of new firms after the tax reform.; The third chapter investigates the relationship between the existence of indeterminacy and income effects on leisure demand. This is done within the first chapter model and the Benhabib-Farmer framework. I show that for utility functions that exhibit no income effects, the equilibrium cannot be indeterminate, implying that income effects are necessary conditions for the existence of indeterminacy. I also show that the necessary condition present in variants of the Benhabib-Farmer framework holds if and only if positive income effects are present. Finally, I demonstrate that negative income effects generate indeterminacy even in the presence of constant or decreasing returns to scale production functions. |
