Growth and Demographic Change

Forthcoming

“Growth and Cycles, in the Mode of Marx and Schumpeter,” Scottish Journal of Political Economy, 57 (2010).

Recent Publications

Public Education and Capital Accumulation
Research in Economics 59 (2005), 85-109

I study an overlapping generations model where physical and human capitals are inputs of production that can be accumulated by withholding resources from current consumption. Human capital is the output of a schooling system which can be financed either by private expenditures, or by taxes, or by a combination of both. In a political equilibrium with majority voting, public school financing turns out to be an instrument to solve a “free rider problem”. By improving the skills of next period’s workers it increases the expected return on physical capital, something which cannot be achieved by means of private expenditure in education only. When financed by a uniform income tax, public schools are also an instrument for intergenerational redistribution. Depending on initial conditions, the model predicts either a poverty trap (poor societies invest too little in education) or persistent growth driven by the accumulation of human capital. The introduction of public financed education shrinks the set of initial conditions leading to the poverty trap. I characterize the global dynamics of the model, which delivers a number of testable hypotheses on the relation between income growth, capital accumulation and the development of public education. All throughout the paper I concentrate on specific functional forms allowing for a closed form solution, nevertheless, all the important results carry over to fairly general utility and production functions.

“Uniqueness of Equilibria in Dynamic Models”, entry int The New Palgrave: A Dictionary of Economics, edited by Bloom and Durlauf.

Unpublished Working Papers

Three Equations Generating an Industrial Revolution?  
With Aubhik Khan and Larry E. Jones

In this paper we evaluate quantitatively the relationship between economic and demographic growth. We use simple models of endogenous growth, featuring human capital investment at the individual level in conjunction with either of two models of fertility choice, the B&B dynastic motive, and the B&J lateage-security motive. We find that exogenous improvements in agespecific survival probabilities, lead to increases in the rate of return to human capital investment. This, in turn, engenders an increase in the growth rate of output per capita much like what is typically seen when countries go through industrialization. In the models implemented so far, we also find that this is accompanied either by a permanent increase in the growth rate of population (for the B&B), or by too much late age consumption and a rate of return on capital that is too high relative to available data (for the B&J). Historical records show that the increase in the growth rate of population during the takeoff was temporary, and that the transition eventually lead to a stationary population; it is unclear if a different version of the B&B model can be built that generates this crucial stylized facts. On the other hand, preliminary work shows that more realistic variations of the B&J model should eliminate the unrealistic predictions about old age consumption and rate of return on capital while maintaining the ability of the model to generate an IR and a DT.

From Busts to Booms in Babies and Goodies 
with Larry E. Jones and Alice Schoonbroodt

After the fall in fertility during the Demographic Transition, many developed countries experienced a baby bust, followed by the Baby Boom and subsequently a return to low fertility. Received wisdom from the Demography literature links these large fluctuations in fertility to the series of Economics ‘shocks’ that occurred with similar timing – the Great Depression, WWII, the economic expansion that followed and then the productivity slow down of the 1970’s. To economists, this line of argument suggests a more general link between fluctuations in output and fertility decisions, of which the Baby Bust-Boom-Bust event (BBB) is a particularly stark example. Surprisingly, little has been done to formally address this link in a stochastic model of optimal fertility choice. This paper is an attempt to formalize the conventional wisdom in simple versions of stochastic growth models with endogenous fertility. First, we develop initial tools to address the effects of “temporary” shocks to productivity on fertility choices. Second, we analyze calibrated versions of these models. We can then answer several qualitative and quantitative questions: Under what conditions is fertility pro- or countercyclical? How large are these effects and how is this related to the ‘persistence’ of the shocks? How much of the BBB can be accounted for by the kinds of medium run productivity fluctuations described as computed from the data?

Fertility and  Social Security
with Larry E. Jones and Maria Cristina DeNardi.
First version October 2003, this version March 2005.

The data show that an increase in government provided old-age pensions is strongly correlated with a reduction in fertility. What type of model is consistent with this finding? We explore this question using two models of fertility, the one by Barro and Becker (1989), and the one inspired by Caldwell and developed by Boldrin and Jones (2002). In the Barro and Becker model parents have children because they perceive their children’s lives as a continuation of their own. In the Boldrin and Jones’ framework parents procreate because the children care about their old parents’ utility, and thus provide them with old age transfers. The effect of increases in government provided pensions on fertility in the Barro and Becker model is very small, and inconsistent with the empirical findings. The effect on fertility in the Boldrin and Jones model is sizeable and accounts for between 55 and 65\% of the observed Europe-US fertility differences both across countries and across time and over 80\% of the observed variation seen in a broad cross-section of countries. Another key factor affecting fertility the Boldrin and Jones model is the access to capital markets, which can account for the other half of the observed change in fertility in developed countries over the last 70 years.

Growth Under Perfect Competition
with David K. Levine
mimeo.  First version: October 1997; this version June 2005.

We construct an abstract, dynamic general equilibrium model of innovation and growth, in the spirit of Schumpeter’s Theory of Theory of Economic Development. Despite the existence of infinitely many commodities and activities, the use of which may vary over time, we give a characterization of equilibrium using the standard first and second welfare theorems, and a standard transversality condition. We consider a series of examples characterizing the dynamic properties of equilibria and show that many results discussed in the “endogenous growth” literature can be obtained as special cases of the model we propose. Next we study the role of initial conditions in the process of economic growth and show that most kinds of “path dependence” discussed in the literature may arise under conditions of perfect competition and in the absence of any external effect.

Innovation and Intellectual Property

Everything in this section is joint work with
David K. Levine (Washington University of St. Louis, Economics Department).

Forthcoming

“Market Structure and Property Rights in Open Source Industries,” WUStL Journal of Law and Politics 29 (2009). PDF

“A Model of Discovery,” American Economic Review, Papers and Proceedings, 99 (2009). This version: January 20, 2009, First version: December 13, 2008.

Empirical research has reached the puzzling conclusion that stronger patents do little or nothing to encourage innovation. We show that the facts that have led to the assumption of fixed cost in the discovery process can be equally well explained by a standard model of diminishing returns. This may explain much of the misunderstanding of the (supposedly positive) role of monopoly in innovation and growth, thereby accounting for the empirical puzzle. PDF File

“Market Size and Intellectual Property Protection,” International Economic Review, 50 (2009).

Intellectual property protection involves a tradeoff between the undesirability of monopoly and the desirable encouragement of creation and innovation. As the scale of the market increases, due either to economic and population growth, or the expansion of trade through treaties such as theWorld Trade Organization, this tradeoff changes. We show that, generally speaking, the socially optimal amount of protection decreases as the scale of the market increases. We also provide simple empirical estimates of how much it should decrease.
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Recent Publications

“Perfectly Competitive Innovation,” Journal of Monetary Economics, 55 (2008), 435-453.

We construct a competitive model of innovation and growth under constant returns to scale. Previous models of growth under constant returns cannot model technological innovation. Current models of endogenous innovation rely on the interplay between increasing returns and monopolistic markets. We argue that ideas have value only insofar as they are embodied in goods or people, and that there is no economic justification for the common assumption that ideas are transmitted through costless spillovers. In the absence of unpriced spillovers, we argue that competitive equilibrium without copyrights and patents fails to attain the  first best only because ideas are indivisible, not because of increasing returns. Moreover, while it may be that indivisibility results in socially valuable ideas failing to be produced, when new ideas are built on old ideas, government grants of intellectual monopoly may lead to even less innovation than under competition. The theory of the competitive provision of innovations we build is important both for understanding why in many current and historical markets there has been thriving innovation in the absence of copyrights and patents, and also for understanding why, in the presence of the rent-seeking behavior induced by government grants of monopoly, intellectual property in the form of copyrights and patents may be socially undesirable. PDF File

Against Intellectual Monopoly, Cambridge University Press, 2008.Against Intellectual Monopoly

It is common to argue that intellectual property in the form of copyright and patent is necessary for the innovation and creation of ideas and inventions such as machines, drugs, computer software, books, music, literature and movies. In fact intellectual property is not like ordinary property at all, but constitutes a government grant of a costly and dangerous private monopoly over ideas. We show through theory and example that intellectual monopoly is not neccesary for innovation and as a practical matter is damaging to growth, prosperity and liberty. Please click the cover!

Intellectual Property and the Efficient Allocation of Social Surplus from Innovation,” in Porrini, Donatella and Ramello, Giovanni, Property Rights Dynamics: A Law and Economics Perspective, Routledge, 2006.

Intellectual Property and the Efficient Allocation of Surplus from Creation
Review of Economic Research in Copyright Issues, 2 (2005), 45-67.

In the modern theory of innovation, monopoly plays a crucial role both as a cause and an effect of creative economic activity. Innovative firms, it is argued, would have insufficient incentive to innovate should the prospect of monopoly power not be present. This theme of monopoly runs throughout the theory of growth, international trade, and industrial organization. We argue that monopoly is neither needed for, nor a necessary consequence of innovation. In particular, intellectual property is not necessary for, and may hurt more than help, innovation and growth. We show that, in most circumstances, competitive rents allow creative individuls to appropriate a large enough share of the social surplus generated by their innovations to compensate for their opportunity cost. We also show that, as the number of pre-existing and IP protected ideas needed for an innovation increases, the equilibrium outcome under the IP regime is one of decreasing probability of innovation, while this is not the case without IP. Finally, we provide various examples of how competitive markets for innovative products would work in the absence of IP and critically discuss a number of common fallacies in the previous literature.
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The Economics of Ideas and Intellectual Property
Proceedings of the National Academy of Sciences, 102 (2005), 1252-1256.

Innovation and the adoption of new ideas is fundamental to economic progress. Here we examine the underlying economics of the market for ideas. From a positive perspective, we examine how such markets function with and without government intervention. From a normative perspective, we examine the pitfalls of existing institutions, and how they might be improved. We highlight recent research by us and others challenging the notion that government awards of monopoly through patents and copyright are ‘‘the way’’ to provide appropriate incentives for innovation.
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Rent-Seeking and Innovation
Journal of Monetary Economics, 51 (2004), 127-160.

Innovations and their adoption are the keys to growth and development. Innovations are less socially useful, but more profitable for the innovator, when they are adopted slowly and the innovator remains a monopolist. For this reason, rent-seeking, both public and private, plays an important role in determining the social usefulness of innovations. This paper examines the political economy of intellectual property, analyzing the trade-off between private and public rent-seeking. While it is true in principle that public rent-seeking may be a substitute for private rent-seeking, it is not true that this results always either in less private rent-seeking or in a welfare improvement. When the public sector itself is selfish and behaves rationally, we may experience the worse of public and private rent-seeking together.
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The Lawrence Klein Lecture. The Case Against Intellectual Monopoly
International Economic Review, 45 (2004), 327-350.

In the modern theory of growth, monopoly plays a crucial role both as a cause and an effect of innovation. Innovative firms, it is argued, would have insufficient incentive to innovate should the prospect of monopoly power not be present. This theme of monopoly runs throughout the theory of growth, international trade, and industrial organization. We argue that monopoly is neither needed for, nor a necessary consequence of innovation. In particular, intellectual property is not necessary for, and may hurt more than help, innovation and growth. We argue that, as a practical matter, it is more likely to hurt.
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Our Thoughts on Intellectual Property

Property Rights and Intellectual Monopoly (joint with David K.Levine). Frequently updated!
This links you to an interconnected series of pages debating innovation, IP, and related policy issues. Most of these pages “live” on David’s server … Maybe one day or another I catch up with him and start updating them myself …

Intellectual Property (joint with David K. Levine).
Intellectual property refers to patents, copyrights, trademarks and other forms of ownership of ideas. It results in monopoly power that has significant consequences for discouraging as well as encouraging innovation and growth – the discouragement effect is especially important when ideas are used as building blocks for other ideas. The economics literature has examined the need for intellectual property; optimal systems of intellectual property; the optimal duration of intellectual property; how innovation takes place in the absence of intellectual property; and the rent-seeking behavior induced by intellectual property.

Intellectual Property, International Trade and Economic Development (joint with David K. Levine).
This is a brief discussion, which appeared in chinese in The People’s Daily in January 2005, of why the current TRIPS agreement, sponsored by the WTO and by western countries (USA and EU especially) within the WTO, is a very BAD agreement. It is bad for developing countries, as it forces them to give up competing with the advanced ones in goods that are protected by IP legislation, and for the people of the advanced countries as well, as it forces them to accept monopoly pricing, higher prices and less innovation. Basically, TRIPS is nothing but a huge income transfer (or subsidy) program from the citizens of the world to the monopolies protected by IP law.

Why Napster is Right! (joint with David K. Levine).

Our original statement that IP protection is bad for society, and that Napster and P2P software are good for economic progress and not just for freedom of expression.

Retroactive Copyright Extension (joint with David K. Levine),
Where it is explained why the economic (and logical, indeed) foundations of Landes W.M. and R.Posner, The Economic Structure of Intellectual Property Law, Harvard U.P. 2003, are, to say the least, shaky. To be more specific, why the “economic structure” they allegedlly provide to contemporary intellectual property law would not pass the test of any economic theory prelim in any self-respected Economics Ph.D. program. An abdridged version of this paper has appeared in The Economists’ Voice.
 

Public Policy and the Welfare State

Social Security

“Social Security Incentives, Exit from the Workforce and Entry of the Young,” (with Pilar Garcia and S. Jimenez), in Jonathan Gruber and David Wise (eds.) Social Security Programs and Retirement around the World: The Relationship to Youth Employment, forthcoming, The University of Chicago Press for the N.B.E.R., 2009. PDF File

In this paper we analyze the relationship between the employment of the young, exit of older people and retirement incentives using data from both the Spanish labor force survey and the Muestra Contínua de Vidas Laborales. Against a priori expectations, we do find some (weak) evidence of positive (negative) relationship between the employment (unemployment) of young and the labor force participation of the older population. However, we are unable to find a clear relationship between the employment of the young and the incentives to retirement created by the Spanish pension system. We believe this is so because retirement incentives have changed very little during the last two decades.

Assessing the Efficiency of Public Education and Pensions (with Ana Montes Alonso), Journal of  Population Economics21 (2008).

Theory says that in an OLG context intergenerational transfer agreements either private or carried out via government intervention, are effcient if the induce equality between certain implicit rates of return. We apply this theory to the case of public education and pensions, where public education is a loan from middle age to young and, a period later, pensions are the repayment of this loan, plus interest, from middle age to old. We use micro and macro data from Spain to estimate how far actual arrangements are from the normative goal. When demographic stationarity is assumed, the results are surprisingly good. We also quantify the impact of undergoing demographic change on the implicit rates of return. The results are unsurprisingly bad. Our estimates point to dramatic changes in future generational rate of returns. Nevertheless, and contrary to earlier predictions in the generational accounting literature, our findings suggest that future generations are not necessarily going to be worse o than current ones.
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“The Implications of Social Security for the Well-Being of the Elderly,” (with S. Jimenez), in Jonathan Gruber and David Wise (eds.) Social Security Programs and Well-being of the Elderly Around the World. The University of Chicago Press for the N.B.E.R., 2007.

The Intergenerational State. Education and Pensions (with Ana Montes),
First version May 1997, Review of Economic Studies72 (2005), 651-664.

When credit markets to finance investment in the human capital of young people are missing, the competitive equilibrium allocation is inefficient. When generations overlap, this failure can be mitigated by properly designed social institutions such as Public Education and Public Pensions. We show that, when established jointly, they implement an intergenerational transfer scheme supporting the complete market allocation. Through the public financing of education, the young “borrow” from the middle age to invest in human capital. When employed, they “pay back” their debt via a social security tax, the proceedings of which finance pension payments to the now elderly lenders. We consider other, allocationally equivalent, financing schemes. In all cases, when the complete market allocation is achieved a certain equality should be observed among implicit rates of return and the market rate of return. We test this prediction by using micro and macro data from Spain. The results are surprisingly good. We also use the model to quantify the impact of undergoing demographic change on the implicit rates of return. The results point, unsurprisingly, to dramatic changes in generational rates of return. Contrary towhat predicted by earlier studies in the generational accounting tradition, our findings suggest that future generations are not necessarily going to be worse off than current ones.
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European Regional Policies

“Regional Policies after the EU Enlargement”, in M. Artis, A. Banerjee and M. Marcellino (eds.) The Central and Eastern European Countries and the EU, Cambridge University Press, 2005.

“Structural Policies and Growth,” in A. Deardoff (ed.) The Past, Present, and Future of the European Union, Blackwell Publ. Co., for the International Economic Association, 2004.
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Macro Policies

“All the Interesting Questions, Almost All the Wrong Reasons” (with David K. Levine), in Pecchi, L. e Piga, G. (eds.) Keynes Grandchildren Seventy Years Later, MIT Press, 2008.

Here is the bottomline: JMK got his economic theory wrong, and the facts too. But, and not a minor feat, he got all his questions and his guess about the future right. This may prove that while the man was a tad arrogant, he perhaps was not a fool. Perhaps, indeed, he was brilliant, possibly so much so that he never had to bother with logical consistency and facts adequate to convince his audiences that he had got it right. Which is a pity, because he could have spared humanity a whole lot of poor economic advising, and academic economists a never-ending debate about what he “really meant,” had he bothered to ponder a bit longer upon some of his statements and their analytical underpinnings. Bygones are bygones and the questions he posed are among the most important an economist may dare to ask. Let us begin with the questions, continue with JMK’s answers and then figure out why, in spite of guessing it right, he got all the “reasons” wrong. PDF File

Business Cycles and Monetary Policy

“Habit Persistence, Assets Returns and the Business Cycle” PDF File
(with L. Christiano and J. Fisher)
 First version: October 1994. American Economic Review  91  (2001), 149-166.

We introduce two modifications into the standard real business cycle model : habit persistence preferences and limitations on intersectoral factor mobility.The resulting model is consistent with the observed mean equity premium, mean risk free rate and Sharpe ratio on equity.With respect to the conventional measures of business cycle volatility and comovement, the model does roughly as well as the standard real business cycle model . On four other dimensions its business cycle implications represent a substantial improvement. It accounts for (i) persistence in output, (ii) the observation that employment across different sectors moves together over the business cycle, (iii) the evidence of excess sensitivity’ of consumption growth to output growth, and (iv) the `inverted leading indicator property of interest rates, ‘that high interest rates are negatively correlated with future output.

“A Theory of Growth Cycles”
(with Jesus Fernandez-Villaverde)
Prelimnary Version: November 3, 2005
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This paper investigates the role of labor-saving technological choices in the generation and propagation of business cycles. We emphasize the importance of endogenously varying relative factor prices as a force behind the introduction of new technologies and the scrapping of existing ones. To do so, we mix pieces of Smith, Marx, Ramsey, Von Neumann, Hicks, Goodwin, Paella, Prescott, Canoce, Tronti, Ortega y Gasset, and many unquoted or onquotable others. VERY AND TRULY PRELIMINARY AND INCOMPLETE. HANDLE WITH CARE, PLEASE .

Forthcoming

“What if Factor Shares are Not Constant? Implications for Growth and Business Cycle Theories”
(With Carmen Carrido Ruiz, Universidad Carlos III, Madrid) 

“The Equity Premium was but is no Longer a Puzzle, the Q-Ratio was and Still is, Big Time”
(With Adrian Peralta Alva , University of Miami)