Competition, innovation and growth with limited commitment

We study how barriers to business start-up affect the investment in knowledge capital when contracts are not enforceable. Barriers to business start-up lower the competition for knowledge capital and, in absence of commitment, reduce the incentive to accumulate knowledge. As a result, countries with large barriers experience lower income and growth. Our results are consistent with cross-country evidence showing that the cost of business start-up is negatively correlated with the level and growth of income.

Adverse selection, credit and efficiency: The case of the missing market

We analyze a standard environment of adverse selection in credit markets. In our environment,entrepreneurs who are privately informed about the quality of their projects need toborrow from banks. Conventional wisdom says that, in this class of economies, the competitiveequilibrium is typically inefficient.We show that this conventional wisdom rests on one implicit assumption: entrepreneurscan only borrow from banks. If an additional market is added to provide entrepreneurs withadditional funds, efficiency can be attained in equilibrium. An important characteristic of thisadditional market is that it must be non-exclusive, in the sense that entrepreneurs must be ableto simultaneously borrow from many different lenders operating in it. This makes it possible toattain efficiency by pooling all entrepreneurs in the new market while separating them in themarket for bank loans.

Economic growth and investment in the Arab world

This paper analyses the economic growth performance in the Arab world overthe last forty years. The Arab world has managed to reduce povertyperformance despite its relatively disappointing growth performance. Werelate this poor performance of both oil and non-oil producers toinvestment. Contrary to widespread belief, we do not find evidence that lowquantity of investment is the main of low growth. The decline in theinvestment rate followed rather than preceded the reduction in the aggregategrowth rate. We conclude that the low quality of investment projects is thekey determinant of growth. The excessive reliance on public investment, thelow quality of financial institutions, the bad business environment (due topolitical and social instability and to excessive public intervention andoverregulation) and the low quality of human capital are importantdeterminants of systematically unproductive investment decisions and, thus,low economic growth.

Product market deregulation and labor market outcomes

We consider the dynamic relationship between product market entry regulationand equilibrium unemployment. The main theoretical contribution is combininga Mortensen-Pissarides model with monopolistic competition in the goods marketand individual wage bargaining. Product market competition affects unemploymentvia two channels: the output expansion effect and a countervailing effect dueto a hiring externality. Competition is then linked to barriers to entry. Acalibrated model compares a high-regulation European regime to a low-regulationAnglo-American one. Our quantitative analysis suggests that under individualbargaining, no more than half a percentage point of European unemployment ratescan be attributed to entry regulation.

Is lumpy investment really irrelevant for the business cycle?

New-Keynesian (NK) models can only account for the dynamic effects of monetary policy shocks if it is assumed that aggregate capital accumulation is much smoother than it would be the case under frictionless firm-level investment, as discussed in Woodford (2003, Ch. 5). We find that lumpy investment, when combined with price stickiness and market power of firms,can rationalize this assumption. Our main result is in stark contrast with the conclusions obtained by Thomas (2002) in the context of a real business cycle (RBC) model. We use our model to explain the economic mechanism behind this difference in the predictions of RBC and NK theory.

Similarities and convergence in G-7 cycles

This paper examines the properties of G-7 cycles using a multicountry Bayesian panelVAR model with time variations, unit specific dynamics and cross country interdependences.We demonstrate the presence of a significant world cycle and show that country specificindicators play a much smaller role. We detect differences across business cycle phasesbut, apart from an increase in synchronicity in the late 1990s, find little evidence of major structural changes. We also find no evidence of the existence of an Euro area specific cycle or of its emergence in the 1990s.

Human capital and externalities in cities

We combine growth theory with US Census data on individual schooling and wages to estimate the aggregate return to human capital and human capital externalities in cities. Our estimates imply that a one-year increase in average schooling in cities increases their aggregate labor productivity by 8 to 11 percent. We find no evidence for aggregate human capital externalities in cities however althoughwe use three different approaches. Our main theoretical contribution is to show how human capital externalities can be identified (non-parametically) even if workers with different levels of human capital are imperfect substitutes in production.

Social security and democracy

Many political economic theories use and emphasize the process of votingin their explanation of the growth of Social Security, governmentspending, and other public policies. But is there an empirical connectionbetween democracy and Social Security program size or design? Using somenew international data sets to produce both country-panel econometricestimates as well as case studies of South American and southern Europeancountries, we find that Social Security policy varies according toeconomic and demographic factors, but that very different politicalhistories can result in the same Social Security policy. We find littlepartial effect of democracy on the size of Social Security budgets, onhow those budgets are allocated, or how economic and demographic factorsaffect Social Security. If there is any observed difference, democraciesspend a little less of their GDP on Social Security, grow their budgetsa bit more slowly, and cap their payroll tax more often, than doeconomically and demographically similar nondemocracies. Democracies andnondemocracies are equally likely to have benefit formulas inducingretirement and, conditional on GDP per capita, equally likely to induceretirement with a retirement test vs. an earnings test.

Value and depreciation of mineral resources over the very long run: An empirical contrast of different methods

The paper contrasts empirically the results of alternative methods for estimating thevalue and the depreciation of mineral resources. The historical data of Mexico andVenezuela, covering the period 1920s-1980s, is used to contrast the results of severalmethods. These are the present value, the net price method, the user cost method andthe imputed income method. The paper establishes that the net price and the user costare not competing methods as such, but alternative adjustments to different scenariosof closed and open economies. The results prove that the biases of the methods, ascommonly described in the theoretical literature, only hold under the most restrictedscenario of constant rents over time. It is argued that the difference between what isexpected to happen and what actually did happen is for the most part due to a missingvariable, namely technological change. This is an important caveat to therecommendations made based on these models.

Fiscal decentralization policies and sub-national government debt in evolving federations

As part of a process of democratization, many countries spanning Europe, Latin Amertica, Africa, and Asia are reorganizing their governments bydevolving fiscal responsibility and authority to newly empowered regionaland local governments. Although decentralization in each country proceedsdifferently, a common element tends to be an initially heavy relianceon central government grants to fund regional spending. We develop atheoretical model of regional borrowing decisions in which the incentivesfor regional borrowing depend crucially on how the regions expect thefederal system of finance to evolve. We examine the implications of themodel using data on Spanish regions for the period 1984-1995 and findevidence that regions may be borrowing inefficiently in response toincentives imbedded in the Spanish system of fiscal decentralization.

Tax incentives and the city

It is difficult to justify tax incentives within the existing economicsliterature on tax competition. We develop a model in which communitiesare interested in attracting firms not only for their own capital butalso for the concentration externalities, a form of agglomerationeconomies, their location bestows on existing firms. We find that itis efficient in this case for communities to offer tax incentives,defined as a tax rate below the benefit tax level, to firms. We presentthe recent relocation of the Boeing Corporation's headquarters fromSeattle to Chicago as a case study.

Horizontal innovation in the theory of growth and development

We analyze recent contributions to growth theory based on the model of expanding variety of Romer (1990). In the first part, we present different versions of the benchmark linear model with imperfect competition. These include the labequipment model, labor-for-intermediates and directed technical change . We review applications of the expanding variety framework to the analysis of international technology diffusion, trade, cross-country productivity differences, financial development and fluctuations. In many such applications, a key role is played by complementarities in the process of innovation.

Financial liberalization, bank crises and growth: Assessing the links

This paper studies the effects of financial liberalization and banking crises on growth. It shows that financial liberalization spurs on average economic growth. Banking crises are harmful for growth, but to a lesser extent in countries with open financial systems and good institutions. The positive effect of financial liberalization is robust to different definitions. While the removal of capital account restrictions is effective by increasing financial depth, equity market liberalization affects growth directly. The empirical analysis is performed through GMM dynamic panel data estimations on a panel of 90 countries observed in the period 1975-1999.

Incomplete markets, labor supply and capital accumulation

In this paper we explore the accumulation of capital in the presence oflimited insurance against idiosyncratic shocks, borrowing constraintsand endogenous labor supply. As in the exogenous labor supply case(e.g. Aiyagari 1994, Huggett 1997), we find that steady states arecharacterized with an interest rate smaller than the rate of timepreference. However,wealsofind that when labor supply is endogenous thepresence of uncertainty and a borrowing limit are not enough to giverise to aggregate precautionary savings .

Modern perspectives on stabilization policies

The present paper describes recent research on two central themes of Keynes General Theory: (i) the social waste associated with recessions, and (ii) the effectiveness of fiscal policy as a stabilization tool. The paper also discusses some evidence on the extent to which fiscal policy has been used as a stabilizing tool in industrial economies over the past two decades.