Three essays on investments and international trade

Abstract

My dissertation analyzes investment decisions made by firms. Chapter 1 develops a dynamic structural model of a single agent decision in order to analyze the effect of voluntary export restrains (VERs) on quality-upgrade and foreign direct investment (FDI) behavior. I estimate the model parameters using a variant of the two-step estimator developed by Bajari, Benkard and Levin (2007). Using panel data of Japanese firms in the U.S. automobile industry, both activities are found to have significant sunk costs, which introduces inter-temporal interactions in decisions. I simulate counterfactuals based on the estimation of the structural model. In the absence of the VERs, both quality-upgrade and the probability of undertaking FDI decrease. The second simulation examines the substitution effect between the two investment activities. The proposal to restrict FDI policy causes a dramatic increase in the level of quality-upgrade. Similarly, the proposal to restrict quality-upgrade policy results in an increase in the probability of FDI. Chapter 2 examines the trade-off of developing a brand facing a firm. Establishing the brand on the one hand reduces liquidity risk perceived by investors through effective marketing, but on the other hand increases market risk through incurring a substantial advertising expenditure to accumulate intangible assets. I estimate the model parameters using a new liquidity-augmented Capital Asset Pricing Model developed by Liu (2006). I find that as advertising expenditure increases, the brand lowers liquidity risk associated with perceived risk by consumers and investors, but increases market risk associated with asset-market structure. Chapter 3 presents a theoretical model of negligence and causation by a firm and examines the influence of the causation test on the level of the firm's investment for care under negligence. In this model, a firm's decision to take care reduces the likelihood of an accident only in the event that some nondeterministic intervention occurs. The effects of the causation test depend on the information available to the court, and the manner in which the test is implemented. The key effect of the causation test is to induce firms to take into account the distribution of the intervention probability as well as its expected value.