Essays with heterogeneous agents: Families and firms

This dissertation consists of two essays. In the first essay I investigate whether trade liberalization increases competition. Location models provide a natural tool for addressing this issue because they capture competition in both prices and product characteristics. Their use in the trade literature has been limited, however, by their difficulty handling firm heterogeneity. This paper develops a novel location model which is robust to arbitrary differences in productivity. In an otherwise standard general equilibrium trade environment, the model remains tractable under consumer preferences which are dramatically more general than those in traditional location models. I analyze the effect of increased competition under a trade reform in a symmetric two country model. As in standard models liberalization increases average firm productivity and reduces surviving firms prices. In a range of parameters that best explains firm data I find that the total number of firms in each market declines, and their isolation in product space increases. The model offers several further advantages over the standard Dixit-Stiglitz framework with CES preferences due to its endogenous generation of variable markups.;In the second essay we analyze the role of frictions in the pattern of intergenerational transfers. Simple theories about why parents give money to their children fail to explain a central puzzle in inter-generational transfers: While they are alive, parents give more money to their poorer children. When they leave bequests, most parents divide money equally among their children regardless of their income. We develop a model in which parents cannot observe their children's productivity. We show that parents differentiate between gifts and bequests to help their children more effectively. Parents are able to use future income uncertainty to provide the children with more help and better incentives. We show that in our model poor children get more in gifts than richer children and bequests are equal for all children under some parameterizations. We build a richer quantitative model to compare the explanatory power of our model as compared with a frictionless environment when parameters are picked to match US income and wealth data. We find that our model significantly reduces the costs needed to rationalize equal division of bequests relative to a frictionless environment.