Innovation in dynamic oligopoly and corporate taxation with financial frictions
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Abstract
This dissertation consists of three essays that study the strategic responses to used-goods markets in the aircraft manufacturing industry and the corporate taxation with financial frictions. The first chapter examines the relationship between innovation, production, and used-good markets. This study sheds new light on the crucial role of innovation as a competitive tool against used-good markets. I estimate heterogeneous consumer demand and production and innovation decisions of oligopolistic firms using a unique data set covering the wide-body aircraft manufacturing industry from 1969 to 2011. My main finding predicts that firms develop new products more frequently and produce less quantity in the presence of active used-good markets.
The second chapter estimates a dynamic structural model of Airbus, Boeing and the used airplane market, and then evaluates government subsidies to Airbus and Boeing, which have recently been ruled illegal by the WTO. I first recover dynamic production costs for each product and dynamic innovation costs. Using the estimates of the dynamic structural model, I find that a production or R&D (research and development) subsidy reduction leads to a delay in firms' innovation; in the aircraft manufacturing industry, a production subsidy reduction has a bigger negative impact on innovation than a subsidy reduction in research and development. I further find that, though it reduces innovation and production, the cut in the government subsidies has a minor effect on consumer welfare due to the presence of active used-goods markets.
The third chapter examines corporate taxation in the presence of financial friction. The financial crisis of 2007-2009 demonstrated that excessive debt financing by firms makes the economy as a whole vulnerable in a crisis. I develop a model that includes informational friction between borrowers and lenders as well as tax advantages of debt. This allows me to quantify the impact of a removal of the tax advantage of debt. I find that abolishing the tax deductibility of debt reduces aggregate debt holding by about 15-20% in the long run. This reduces corporate default rates and thus mitigates the economy's sensitivity to financial shocks.