Essays in Empirical Development Economics: The Role of Income Shocks on Firm and Household Dynamics

This thesis consists of three essays that examine the causal effects that income shocks have on firm and household dynamics. In the first chapter, I examine the role that income shocks have on the financial performance of small firms in Ecuador. I find that the effect on various measures of firm growth is significant, albeit temporary. The main contribution of this chapter to the literature is that it shows that the nature and duration of demand shocks, not just their magnitude, are an essential factor in explaining firm growth. In the second chapter, I examine the role that income shocks have on household expenditures on human capital and non-durable consumption using the menor cuantia process as identification strategy. Overall, I find that household expenditure is highly sensible to temporary income shocks. In the third chapter, we examine the role that income shocks have on four key areas of education: school attendance, educational expenditures, child labor, and competency level in mathematics. We find that a higher household income increases the odds of children attending school, increases schooling expenditures, decreases the odds of child labor, and increases the odds for children to reach a higher level of proficiency in mathematics. When we break down the average estimates across household types, we find that income shocks have almost no effect on school attendance and child labor for those households that rely on farming as their main source of income.