Reopening the convergence debate: A new look at cross-country growth empirics

There are two sources of inconsistency in existing cross-country empirical work on growth: correlated individual effects and endogenous explanatory variables. We estimate a variety of cross-country growth regressions using a generalized method of moments estimator that eliminates both problems. In one application, we find that per capita incomes converge to their steady-state levels at a rate of approximately 10 percent per year. This result stands in sharp contrast to the current consensus, which places the convergence rate at 2 percent. We discuss the theoretical implications of this finding. In another application, we perform a test of the Solow model. Again, contrary to prior reults, we reject both the standard and the augmented version of the model.     

The effect of working time and labor force participation on unemployment: A new argument in an old debate

This paper introduces a new argument into the theoretical literature on labor market effects of changes in working hours and labor force participation. We advance a general equilibrium model in which increased labor supply reduces unskilled unemployment via consumer demand: longer work hours and higher labor force participation imply higher incomes and less (leisure) time. In consequence, home production is reduced in favor of outsourcing domestic tasks to the market, shifting consumer demand toward unskill-intensive goods. Relative demand for unskilled labor rises and unemployment falls.     

Measuring capacity utilization and excess demand

This paper investigates the usefulness of qualitative data on capacity utilization (CU) in approximating various macroeconomic variables which are not covered by direct statistical measurement. By help of a model of demand distribution over firms, the relation between a qualitative CU measure, an ‘ideal’ CU measure, and excess demand, is studied for changing levels of aggregate demand. The model is then used to derive time series for capacity, utilization and excess demand from a qualitative CU index and an index of production. Results suggest that qualitative data may provide better measurement of capacity and utilization than, e.g., the Wharton index, and may also perform well in the measurement of excess demand.     

Cost competition: new evidence on an old issue

The relation between cost changes and market share changes is examined for five size ranked cohorts of firms in US manufacturing industries. Cost reductions are expected to yield market share increases via associated price reductions. It was found that this is indeed the case, although the realation is not strong. A 10% cost reduction produces roughly a 2% market share increase, an estimated which for various reason is most likely a lower bound. Cost reductions are also associated with both price reductions and price-cost margin increases.     

You can't have a CGE recession without excess capacity

Simulations with dynamic, single country, CGE models typically imply that reductions in domestic demand, e.g. a cut in investment, generate increases in exports and reductions in imports facilitated by real depreciation. However, currently in the U.S. a large reduction in investment is occurring simultaneously with a contraction in exports and little movement in the real exchange rate. We show that to describe this situation it is necessary to drop the standard CGE assumption that capital is always fully employed in every industry. After introducing an excess capacity specification, we simulate the U.S. recession with and without the Obama stimulus package.     

Capacity utilization measures and excess capacity in multi-product privatized fisheries

Using individual firm data from before and after the introduction of individual transferable quotas (ITQs) in the Nova Scotia mobile gear fishery, data envelopment analysis (DEA) is used to examine capacity and capacity utilization (CU). This paper is the first to look at CU in a multi-species fishery with both ITQ and non-ITQ components. The paper examines how a change in the property rights regime can affect a multi-product industry and the consequences in terms of product-specific CU, as well as aggregate CU. The results provide insights to regulators interested in using market-based approaches to improve efficiency in multi-product industries.     

Direct versus intermediated finance: An old question and a new answer

We consider a closed economy where a risk neutral bank competes with a competitive bond market. Firms can finance a risky project either by a bank credit or by issuing a bond which is directly sold to risk averse investors who also hold safe deposits at the bank. We show that the bank tends to allocate more capital to lower quality projects but there are some interesting qualifications. If the asymmetric information concerns only the success probability, then we observe adverse selection while if it concerns only the expected return, bad types are driven out of the market.     

Evenly rotating economy: A new modeling technique for an old equilibrium construct

In the middle of the twentieth century, just five years before Arrow and Debreu proved the existence of an equilibrium for a competitive economy in the Walrasian system, Ludwig von Mises introduced the English-speaking world to his alternative equilibrium construct: the evenly rotating economy. In contrast to Arrow and Debreu, which characterizes equilibrium as a unique vector of prices and quantities, Mises depicts equilibrium as a pattern of behavior. After reviewing the Misesian conception of equilibrium and its failure to take hold in the profession, I turn to the modern literature. I contend that the evenly rotating economy is a special case of the now-prevalent class of search-theoretic exchange models. As such, I argue that this class of models is particularly well suited for applications considered by economists working in the Austrian tradition.     

Long-term regional convergence in Mexico: A new look

This paper explores the convergence hypothesis of Mexican states with the national level and with one another from 1940 to 2015. Interpreting convergence as catching-up, we also capture other types of regular evolution, namely, invariance of the income gap over time, permanent absence of the gap, and steadily increasing gap (deterministic divergence). As a tool of econometric analysis, we use a novel model that describes convergence by asymptotically decaying trends and covers other types of evolution as particular cases. The results obtained suggest one or other type of regularity to be peculiar to roughly ca. 40% of income gaps both with the national level and between states. However, convergence is observed only in 6% to 15% of cases. Regarding convergence at the national level, an additional analysis by three 50-year subperiod shows that in many cases the type of evolution changes for the same state from one subperiod to another. Analyzing convergence between states, we find that convergence between neighboring states is more frequent than between other states; however, the effect of the neighborhood is not too strong.     

Commitment and choice of partner in a negotiation with a deadline

This paper analyses the effects of partially revocable endogenous commitments of a seller in a negotiation with a deadline. In particular, we examine when commitment is a source of strength, a source of inefficiency and when it does not affect the bargaining outcome at all. We show that when commitment possesses a minimum amount of irrevocability this crucially determines the bargaining outcome. In the bilateral bargaining case, commitment becomes a source of inefficiency since it causes a deadline effect. In the choice of partner framework, however, the deadline effect disappears and there is an immediate agreement and, moreover, commitment becomes a source of strength since it increases the seller's equilibrium payoff by triggering off competition between the buyers.     

Economic freedom and growth specification debate: a retrospective

This article revisits a 2006 theoretical debate on the appropriate specifications for testing the relationship between economic outcomes and economic freedom. It provides out-of-sample empirical tests corresponding to each of the theoretical positions of the two sides of the debate. The two methods of testing the relationship essentially tie in their ability to predict out-of-sample, although neither model predicts very well for the decade following the debate.     

Why the poor do not expropriate the rich: an old argument in new garb

We consider a political economy with two partisan parties; each party represents a given constituency of voters. If one party (Labour) represents poor voters and the other (Christian Democrats) rich voters, if a redistributive tax policy is the only issue, and if there are no incentive considerations, then in equilibrium the party representing the poor will propose a tax rate of unity. If, however, there are two issues – tax policy and religion, for instance – then this is not generally the case. The analysis shows that, if a simple condition on the distribution of voter preferences holds, then, as the salience of the non-economic issue increases, the tax rate proposed by Labour in equilibrium will fall – possibly even to zero – even though a majority of the population may have an ideal tax rate of unity.     

Efficiency and Lack of Commitment in an Overlapping Generations Model with Endowment Shocks

This paper considers a pure exchange stochastic overlapping generations model in which, on each date, an economy faces an aggregate endowment shock. On each date, a young agent and an old agent simultaneously decide how much of their respective endowments to transfer to the other agent; however, a young agent cannot make promises about how much he or she will give when old. In this sense, an economy faces a limited commitment constraint. This paper characterizes an efficient intergenerational risk sharing allocation that satisfies a limited commitment constraint, and also studies the role of money and history in a stochastic overlapping generations economy.     

Unionized labor market and licensing by a monopolist

We show that a monopolistic final goods producer may find it profitable to create competition by licensing its technology if the input market is imperfectly competitive. With a centralized union, we show that licensing by a monopolist is profitable under both uniform and discriminatory wage settings by the union. However, the incentive for licensing is higher under the former situation. We also show that licensing by the monopolist is profitable under both quantity and price competition, and the incentive for licensing is higher under price competition than under quantity competition. Our qualitative results hold even with decentralized unions.