Empirical studies on investment dynamics and wage inequality

This dissertation analyzes the effect of macroeconomic variables on input demand at the plant-level. The issues addressed are the effect of exchange rate uncertainty on investment, the role of investment irreversibility in determining plant-level investment dynamics, and the effect of technology adoption on wage inequality after trade liberalization.; The first chapter provides empirical evidence on the effect of real exchange rate uncertainty on investment under the presence of irreversibility in the investment process. It combines industry-specific real exchange rate data with a 22-year panel of Chilean manufacturing plants. Uncertainty has a significant negative effect on plant-level investment. Consistent with theoretical predictions, the response of investment to uncertainty is heterogeneous: the effect is stronger for plants with a high degree of market power and those importing intermediate inputs. Additionally, exchange rate volatility has a significant negative effect for machinery investment but not for vehicles, implying that irreversibility in adjustment costs plays a major role in determining the investment-uncertainty relationship.; The second chapter estimates a fully specified structural model of investment with maximum likelihood techniques. The estimation procedure allows for irreversibility of investment. Owing to illiquid second hand markets and a smaller size distribution of firms, such non-convexities are a prevalent feature of plant-level investment in developing economies. The structural model characterizes both the decision of when to invest and how much to invest as functions of underlying observable state variables such as the current capital stock and productivity. The results imply that irreversibility plays an important role in determining plant-level investment dynamics.; The third chapter examines the relative demand for skilled workers in a developing economy following trade liberalization. If trade liberalization is associated with the adoption of new technologies, and technology is skill-biased, the relative demand for skilled workers may rise, contradicting the standard trade theory prediction. For the Chilean manufacturing sector, the relative demand for skilled workers increases following trade liberalization. This increase coincides with an increased propensity to adopt new technologies as measured by patent usage. This suggests that skill-biased technological change is a significant determinant of labor demand and wage structures in developing economies.