What factors underlie industry differences in research intensity and productivity growth? We develop a multi-sector endogenous growth model allowing for industry-specific parameters in the production functions for output and knowledge, and in consumer preferences. We find that industry differences in both productivity growth and R&D intensity mainly reflect differences in "technological opportunities", interpreted as parameters of knowledge production. These include the capital intensity of R&D, knowledge spillovers, and diminishing returns to R&D. Among these parameters, we find that the degree of diminishing returns to R&D is the dominant factor when the model is calibrated to account for cross-industry differences in the US.

JEL Codes: D24, D92, H21, H25, O31, O33, O41.

Keywords: Multisector growth, total factor productivity, R&D intensity, technological opportunity, receptivity, appropriabilitiy, research subsidies.

The benefits from financial development are known to vary across industries. However, no systematic effort has been made to determine the technological characteristics that are shared by industries that tend to grow relatively faster in more financially developed countries. This paper explores a range of technological characteristics that might underpin differences across industries in the need or the ability to raise external funding. We find that industries that grow relatively faster in more financially developed countries tend to display greater R&D intensity or investment lumpiness, indicating that well-functioning financial markets direct resources towards industries that grow by performing R&D.

JEL Codes: D24, D92, G18, L60, O10, O16.

Keywords: External finance dependence, financial development, industry growth, R&D intensity, investment lumpiness, production technology.

We develop a general equilibrium multi-industry model in which firms may use external funds to conduct productivity-enhancing R&D. In the model, firms in R&D-intensive industries are more dependent on external funding, and tend to grow relatively faster in more financially developed environments -- consistent with empirical evidence. For reasonable parameterizations, implications for aggregate growth are as follows. (1) GDP in a less financially developed country may not converge over time to GDP in a frictionless economy, if its fastest-growing industry is financially constrained. (2) Industrial diversification first increases and then decreases along the growth path. Finally, we use the model to decompose the interaction between financial development and R&D intensity into different channels and test which of them are empirically important. Our analysis suggests that the main channel is the relatively lower "ability" of R&D intensive firms to raise external funds.

JEL Codes: D24, D92, G18, L60, O10, O16.

Keywords: Financial development, industry growth, R&D intensity, income convergence, stages of diversification.

Two issues related to mapping a multi-sector model into a reduced-form value-added model are often neglected: the composition of intermediate goods, and the distinction between value added productivity and gross output productivity. We demonstrate their quantitative significance for the case of the well known model of Greenwood, Hercowitz and Krusell (1997), who find that about 60% of economic growth can be attributed to investment-specific technical change (ISTC). When we recalibrate their model to allow for even a small equipment share of intermediates, we find that ISTC accounts for almost the entirety of post-war US growth.

JEL Codes: E13, O30, O41, O47.

Keywords: Intermediate goods, investment-specific technical change, growth accounting, gross output, multisector growth models.

Across European countries, rates of entry and exit in research-intensive industries are found to be disproportionately sensitive to the level of financial development. Financial development is also related to increased R&D spending in such industries, as well as indutry growth. The predominant institutional factor underlying these results appears to be the strength of property rights related to intangibles, whereas physical property rights and contract enforcement appear less important. The results suggest that an important role of finance in development may be to spur entrepreneurial activity by fostering innovation, supported by the protection of the intangible assets that define the firm.

JEL Codes: G18, L26, O14, O16, O33.

Keywords: Entry, exit, financial development, R&D intensity, entrepreneurship, property rights, creative destruction.

We develop a dynamic exchange environment to analyze the value created by contracting institutions. In the model, a contract is a pre-agreed specification of behavior, which may be subsequently enforced by a third party. We study the effect of economic fundamentals on the demand for such an enforcement agency. We show that this demand may exist even when contracts are sometimes broken in equilibrium, and ask whether this demand is increasing in the potential gains from exchange. Surprisingly, this is not always the case -- indeed, if the gains are sufficiently large, the demand may drop to zero. We identify the discount factor and the quality of enforcement as crucial factors behind this relationship.

JEL Codes: H11, H41, K42, 017.

Keywords: Contracting institutions, third party enforcement, demand for contracts, gains from trade.

We estimate the impact of size on the returns to hedge funds, and characterize the distribution of hedge fund manager "talent". We find that a 10 percent increase in hedge fund size leads to a decrease in returns of over 20 basis points. The distribution of manager talent appears not to change noticeably among cohorts - suggesting that it is a scarce resource - and both talent and luck have similar contributions to cross-sectional variation in hedge fund returns.

Given these findings, we develop a theoretical model of the hedge fund industry which corresponds closely to the empirical specification, to study the response of the industry to changes in regulatory regimes. In the model, we find that an increase in the cost of entry can cause a large reduction in the number of active hedge funds while leaving industry profits and industry assets under management relatively unaffected. By contrast, modest decreases in leverage ratios or increases in the cost of leverage have little influence on the number of funds, but decrease hedge fund assets and profits significantly. The model proposes a resolution of the tension between the widespread belief in the importance of talent in hedge funds versus the difficulty of empirically identifying systematic differences in hedge fund returns.

JEL Codes: G11, G14, G23, L25, L84.

Using European data, this paper finds that (1) industry entry and exit rates are positively related to industry rates of investment-specific technical change (ISTC); (2) the sensitivity of industry entry and exit rates to cross-country differences in entry costs depends on industry rates of ISTC.

The paper constructs a general equilibrium model in which the rate of ISTC varies across industries and new investment-specific technologies can be introduced by entrants or by incumbents. In the calibrated model, equilibrium behavior is consistent with stylized facts (1) and (2), provided the cost of technology adoption is increasing in the rate of ISTC.

JEL Codes: D24, D92, L11, L16, L26, O33, O38, O41.

Keywords: Entry, exit, turnover, investment-specific technical change, entry costs, vintage capital, embodied technical change, selection, obsolescence, structural change.

The paper investigates the role played by entry and exit in the short run behavior of a general equilibrium model with industry dynamics. In order to preserve potential non-linearities in the impulse responses, I focus on the transition dynamics of the economy after shocks. Entry and exit are found to be insensitive to productivity shocks of reasonable magnitude. Moreover, the dynamics of GDP are insensitive to whether rates of entry and exit themselves fluctuate along with productivity. As an application of the model, the paper also asks whether firing costs may interact with entry and exit to affect transition dynamics after shocks.

JEL Codes: E32, J65, L11, M13.

Keywords: entry and exit, business cycles, transition dynamics, asymmetry, firing costs.

The presumption that R&D is a key driver of economic growth is difficult to reconcile with the empirical evidence. For example, in most studies, which identify technical change with total factor productivity (TFP), the link between TFP and measures of knowledge is found to be weak.

This paper shows that a reconciliation may be possible in a model where R&D contributes to growth through investment-specific technical change. Such a model predicts that the empirical link between knowledge and productivty would be weak even if the generation of knowledge is the predominant factor of economic growth. The paper also shows that estimates of the production function for knowledge using patent data may be biased.

JEL Codes: E300, O300, O400, O470.

Keywords: R&D, ideas' production, endogenous growth, patent data, investment specific technical change.

This paper constructs a general equilibrium model with technology adoption, in which labor reallocation is determined by the rate of embodied technical change (ETC) and by labor market rigidities. In the calibrated model, ETC has a positive effect on aggregate employment, but this effect is weaker in the presence of firing costs for most plausible parametrizations. As a result, a higher rate of ETC generates a modest increase in the divergence of employment outcomes across countries that have different levels of institutional firing costs. Central to this result is the link between adoption costs and the rate of embodied technical change.

Keywords: embodied technical change, firing costs, adjustment costs, employment, turbulence, flexibility.

JEL Codes: E6, J21, J63, J65, L63, L86, O33, O38.

I develop a general equilibrium model in which the accumulation of organizational capital is central for establishment dynamics. I compare its transition dynamics after a shock that introduces an incompatibility between new productive processes and accumulated organizational capital with those of the productivity slowdown. The model is capable of reproducing the puzzling persistence of the slowdown, as well as the 40% stockmarket slump and observed establishment cohort effects. Unlike other accounts, it also reproduces an increasing average age of capital over the transition.

JEL Codes: D23, E32, N10, O40.

I develop a dynamic general equilbrium model with a view to studying the effects of industrial subsidies to failing establishments. Interestingly, subsidies to failing plants actually increase productivity and decrease the age of technology at the average plant. In spite of this, aggregate labor productivity, employment and income decrease.

Keywords: embodied technical change, industrial support, employment protection, creative destruction, economic depreciation.

JEL Codes: E6, J6, L5, O38

Employment protection policies such as mandated severance pay have been the focus of much attention in accounts of cross-country variations in labor market performance. This literature has largely neglected the fact that dismissal costs are treated differently depending on whether or not job destruction is taking place at establishments that are failing. Indeed, depending on the treatment of worker claims in bankruptcy prodecudes, exit may be a way to avoid dismissal costs.

I develop and calibrate a general equilibrium model with close attention to the quantitative importance of the exit margin. I find that the effects of dismissal costs are larger when exit is allowed as a margin of adjustment, but that they can be much smaller when exiting plants are exempt from paying them. Indeed, the same labor market outcomes may be consistent with employment protection regimes of widely varying intensity. I discuss the implications of these results and propose directions for future research.

JEL Codes: E24, G33, G38, J32, J38, J63, J65, L11.

Keywords: employment protection, severance pay, job destruction, entry and exit, plant life cycle, bankruptcy.

Do institutional firing costs slow the diffusion of information and communications technology (ICT)? The paper develops a model in which, as the technolgy at a given firm drops behind the best practice, it optimally reduces its workforce. As a result, firing costs are particularly detrimental to profits in industries in which technical change is rapid -- such as ICT -- and countries with high firing costs specialize in industries in which technical change is sluggish. The$ industry composition is a new channel through which labor market regulation might impact macroeconomic aggregates.

JEL Codes: J32, J65, L16, L63, O33, O38.

Keywords: Employment protection, rate of technical change, information and communications technology, digital divide, industry composition.