| dcterms.abstract | This thesis evaluates macroeconomic consequences of entrepreneurs’ response to fiscal policy reforms and aggregate price movement in a quantitative macroeconomic framework. Motivated by active discussions among policy circles, impending tax reforms, and experience of the U.S. economy during the Great Recession, I study effects of corporate profit tax reforms and aggregate housing price movement while taking into account empirically consistent features of entrepreneurship and institutional details of the U.S. economy. In the first part of my thesis, I study long-term and short-term effects of corporate profit tax reforms on macroeconomic aggregates, entrepreneurial investment, wealth inequality and welfare. My model economy takes into account differential tax treatment of corporate income and non-corporate income and double taxation of corporate income as practiced in the U.S. I incorporate entrepreneurial characteristics such as investment risks, borrowing constraints and lack of diversification, which are consistent with current empirical evidence. The main contribution of this study is to study corporate income tax reforms in an environment that simultaneously accounts for aforementioned entrepreneurial features as well as institutional details of U.S. corporate income tax law. My findings show that corporate profit tax reforms affects the scale at which entrepreneurial projects are undertaken, induces reallocation of resources across sectors with consequences for aggregate efficiency and distribution of wealth. Specifically, when corporate profit tax is reduced it diverts capital from entrepreneurial sector to the corporate sector, entrepreneurs operate smaller firms and wealth inequality declines. For each reform considered, I measure welfare gain across individuals by computing transition dynamics to account for the cost incurred in the short run. I find that it is easy to garner political support for the reform because all workers who make up 90\% of the population gain. In the second part of my thesis, I study effects of aggregate house price movement on small business debt portfolio and output. Entrepreneurs in my model are risk-averse and have access to secured credit collateralized by their home equity and defaultable unsecured credit. Entrepreneur's access to defaultable unsecured credit in financing risky small business captures an important trade-off they face between insurance provided by unsecured credit and cheaper secured credit when choosing their business debt portfolio. I calibrate the model to the non-corporate sector of the U.S. economy and carry out an experiment in which there is an unanticipated drop in aggregate housing price and evaluate its effect on entrepreneurs’ debt portfolio and output. More specifically, my experiment involves dropping the aggregate housing price by 30\%, which is equivalent to the change observed during the Great Recession. My results show that when the housing price drops by 30\%, output in small business sector drops by 0.13\%. Strikingly, the magnitude of effect of housing price drop on small business output is significantly smaller in my model compared to findings in existing literature. More interestingly, my model predicts that when housing price drops, the share of unsecured credit goes down in entrepreneurs' debt portfolio, which is consistent with the data from the Great Recession. To my knowledge this is the first paper that is able to produce effects of housing price collapse on small business debt portfolio that is consistent with the data and thus makes a novel contribution to quantitative macroeconomic literature. I conclude that our model accurately captures the complex relationship between house prices and small business activity. | |
