Essays on Industrial Policy and Communication The Harvard community has made this article openly available. Please share how this access benefits you. Your story matters Citation Rotemberg, Martin. 2015. Essays on Industrial Policy and Communication. Doctoral dissertation, Harvard University, Graduate School of Arts & Sciences. Citable link http://nrs.harvard.edu/urn-3:HUL.InstRepos:17467295 Terms of Use This article was downloaded from Harvard University’s DASH repository, and is made available under the terms and conditions applicable to Other Posted Material, as set forth at http:// nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of- use#LAA Essays on Industrial Policy and Communication A dissertation presented by Martin Sebastian Rotemberg to The Committee on Higher Degrees in Business Economics in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the subject of Business Economics Harvard University Cambridge, Massachusetts April 2015 © 2015 - Martin Sebastian Rotemberg All rights reserved. Dissertation Advisor: Author: Professor Richard Hornbeck Martin Sebastian Rotemberg Essays on Industrial Policy and Communication Abstract In my dissertation, I study government policies and their effects on the behavior of agents in the economy. Chapter 1 discusses the effects that subsidies for small firms have on aggregate output and productivity, with an empirical application to policies in India. Chapter 2 studies the effects of lowering communication costs on structural transforma- tion, with an empirical focus on the roll out of Rural Free Delivery in the United States. Chapter 3 presents a method to estimate the effects that increased transparency have on deliberation, in particular that of the Federal Reserve Bank. iii Contents 1 Equilibrium Effects of Firm Subsidies 1 1.1 Introduction . .1 1.2 Institutional Background . .7 1.2.1 Overview of small-scale firm policies in India . .7 1.3 Analytical Framework . 10 1.3.1 Direct and Indirect Effects Considering a Single Product . 10 1.3.2 The Effect of Changing Subsidies . 13 1.3.3 Multi-Product Firms . 16 1.3.4 Trade and Observed Heterogeneous Product Characteristics . 17 1.3.5 Location of Sales and Unobserved Heterogeneous Product Charac- teristics . 19 1.4 Data and Identification Strategy . 20 1.4.1 Constructing Measures of Exposure . 22 1.4.2 Product Characteristics . 27 1.4.3 Identification Strategy . 28 1.5 Estimating the Direct Effect of Eligibility . 30 1.5.1 Plots of Program Effects . 32 1.5.2 Effects of the Program on Firm-level Economic Outcomes . 33 1.6 Estimating the Indirect Effect of Eligibility Through Competition in Output Markets . 36 1.6.1 The Effects of Output Competition, Treating All Products Similarly . 36 1.6.2 Trade and Output Competition . 39 1.6.3 Permutation Tests . 44 1.6.4 Other Product Characteristics and Output Competition . 46 iv 1.6.5 Aggregate Effects of the Policy Change . 48 1.7 Effects of the Reallocation of Economic Activity . 50 1.7.1 Effect of the Policy Change on Firm Productivity and Relative Prices 52 1.7.2 Aggregate TFP Growth . 55 1.8 Conclusion . 59 2 Communication and Manufacturing: Evidence from the Expansion of Postal Services 61 2.1 Introduction . 61 2.2 Historical Background . 65 2.3 Communication and Sector-Specific Investments . 70 2.3.1 Setup . 70 2.3.2 Communication Costs . 72 2.4 Data and Empirical Strategy . 74 2.4.1 Newspapers . 82 2.5 Results . 83 2.5.1 Placebo Tests . 85 2.6 Discussion and Conclusion . 85 3 How Federal Reserve Discussions Respond to Increased Transparency 87 3.1 Historical Background . 91 3.1.1 Data availability . 91 3.1.2 FOMC Members . 92 3.1.3 Data . 93 3.2 Methodology . 93 3.2.1 Notation . 95 3.2.2 Similarity Metric Axioms . 95 v 3.2.3 Cosine Similarity . 96 3.2.4 Generalized Cosine Similarity . 97 3.2.5 Growth in Cosine Similarity . 97 3.2.6 Growth in Cosine Similarity in the Data . 100 3.2.7 Constructing the Term-Relationship Weight Matrix . 100 3.3 Results . 102 3.3.1 The Evolution of Language after Transparency . 102 3.4 Conclusion . 107 4 References 108 5 Appendix 117 5.1 Appendix: Equilibrium Effects of Firm Subsidies . 117 5.1.1 Alternate Derivation of Direct and Indirect Effects. 117 5.1.2 An Issue with Industry Codes . 121 5.1.3 Within-District Exposure . 122 5.2 Appendix: How Federal Reserve Discussions Respond to Increased Trans- parency . 124 5.2.1 Model . 124 5.2.2 Setup of FOMC member’s motivations . 127 5.2.3 Credit-Seeking . 129 5.2.4 Predictions of credit-seeking model . 130 5.2.5 Effort Model . 132 5.2.6 Predictions of effort model . 132 5.2.7 Effort model derivations . 133 5.2.8 Topic modeling with a dictionary . 135 5.2.9 Topic Models on Out-of-Sample Dictionaries . 135 vi 5.2.10 Economic topics in the transcripts over time . 136 5.2.11 A bound on vector similarity when trimming vectors . 138 List of Tables 1 Summary Statistics . 31 2 Tests for Firm-Size Manipulation . 33 3 Differences in Differences Estimates of the Direct Effect of Firm Subsidies . 35 4 Differences in Differences Estimates of the Indirect Effects of Firm Subsi- dies on Output . 37 5 Differences in Differences Estimates of the Indirect Effects of Firm Subsi- dies on Inputs . 38 6 Differences in Differences Estimates of the Indirect Effects of Firm Subsi- dies on Output and Trade . 40 7 Differences in Differences Estimates of the Indirect Effects of Firm Subsi- dies on Inputs and Trade . 41 8 Permutation Tests of Differences in Differences Estimates of Placebo Firm Subsidies . 44 9 Differences in Differences Estimates of Heterogeneous Effects of Firm Sub- sidies . 47 10 Differences in Differences Estimates of the Aggregate Effects of Firm Sub- sidies . 50 11 Differences in Differences Estimates of the Effects of Firm Subsidies on Firm Productivity . 53 12 Differences in Differences Estimates of the Effects of Firm Subsidies on Firm Input Costs . 54 vii 13 Differences in Differences Estimates of the Effects of Firm Subsidies on Firm Input Costs . 58 14 Effect of Percent Treated on Predicted Manufacturing Outcomes in 1900 . 78 15 Effect of Instrument on Predicted Outcomes in 1900 . 81 16 Effect of Percent Treated on Predicted Outcomes in 1900 . 82 17 Effect of Percent Treated on Newspapers in 1900 . 84 18 Effect of Rural Free Delivery on Manufacturing in 1900 . 85 19 Effect of Future Rural Free Delivery on Manufacturing in 1890 . 86 20 Differences in Differences Estimates of the Local Effects of Firm Subsidies on Output . 125 21 Differences in Differences Estimates of the Local Effects of Firm Subsidies on Inputs . 126 List of Figures 1 Distribution of Small Firms Across India . .2 2 Small Firm Subsidies in India . .8 3 Distribution of Multi-Industry Products . 24 4 Scatterplots of Different Measures of Exposure to the Change in Eligibility . 26 5 Distribution of Nominal Assets Before Policy Change in 2006 . 32 6 Event-Study Plot of Coefficients: Effect of Being Small on Sales . 34 7 Event-Study Plot of Coefficients: Effect of Product Market Competition . 43 8 Event-Study Plot of Coefficients: Effect of Being Small on Revenue Produc- tivity . 55 9 Year of First Rural Free Delivery Route by County . 67 10 Data on RFD Roll Out from the Annual Report of the Postmaster General, 1900.......................................... 75 viii 11 Year of First Rural Free Delivery Route by County . 77 12 Relationship Between RFD and Local Population . 80 13 Federal Reserve Documents from 1936 - Present . 92 14 Career Durations of Appointive FOMC Members. ................. 94 15 Cosine Similarity of FOMC Transcripts and Corresponding Public Summaries from 1976-2007 ....................................... 102 16 Decomposition of similarity growth into public and private contribution ...... 104 17 Economics language in speech over time ....................... 105 18 Word similarity growth contribution for generalized cosine similarity ....... 106 19 Topics in the ODE .................................. 136 20 ODE topics over time ................................. 137 ix Acknowledgments My graduate school career would not have been nearly as fulfilling without the con- stant support and encouragement of my colleagues and friends. I am particularly in- debted to my advisors. Richard Hornbeck has never stopped pushing me.