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Abstract:
This paper argues that openness to goods trade in combination with an unequal distribution of political power has been a major determinant of the comparatively slow development of resource- or land-abundant regions like South America and the Caribbean in the nineteenth century. We develop a two-sector general equilibrium model with a tax-financed public sector, and show that in a feudal society (dominated by landed elites) productivity-enhancing public investments like the provision of schooling are typically lower in an open than in a closed economy. Moreover, we find that, under openness to trade, development is faster in a democratic system. We also endogenize the trade regime and demonstrate that, in political equilibrium, a land-abundant and landowner-dominated economy supports openness to trade. Finally, we discuss empirical evidence which strongly supports our basic hypotheses.

economic development, institutions, political system, public education, trade

Abstract:
This paper argues that openness to goods trade in combination with an unequal distribution of political power has been a major determinant of the comparatively slow development of resource- or land-abundant regions like South America and the Caribbean in the nineteenth century. We develop a two-sector general equilibrium model with a tax-financed public sector, and show that in a feudal society (dominated by landed elites) productivity-enhancing public investments like the provision of schooling are typically lower in an open than in a closed economy. Moreover, we find that, under openness to trade, development is faster in a democratic system. We also endogenize the trade regime and demonstrate that, in political equilibrium, a land-abundant and landowner dominated economy supports openness to trade. Finally, we discuss empirical evidence which strongly supports our basic hypotheses.

economic development, institutions, political system, public education, trade

Abstract:
The theory of endogenous technical change has deeply contributed to our understanding of the fundamental sources of economic growth and development. In this chapter we survey important contributions in the field by focussing on the basic structure of endogenous growth models with horizontal as well as vertical innovation and emphasizing important implications for growth policy. We address issues like the scale effect problem, directed technological change to understand the evolution of wage inequality, long-run divergence between the innovating North and the imitating South due to inappropriate technology in the South, the relationship between trade and growth, competition and R&D, and the role of imperfect capital markets for R&D-based growth

endogenous technical change, economic growth, horizontal innovations, scale effects, vertical innovations

Abstract:
A positive relationship between firm size and product diversification is a long-standing stylized fact. However, so far there is no appropriate theoretical model to explain the underlying forces of this observation. This paper analyzes an oligopoly model with asymmetric multiproduct firms, which is capable of addressing this issue. The model suggests that intangible assets of firms, which affect marginal costs or perceived quality of goods within a firm's product line, play a key role for the empirical regularity that larger firms are more diversified.

asymmetric equilibrium, diversification, firm size, intangible assets, multiproduct firms

Abstract:
Empirical evidence suggests that positive externalities from R&D exceed negative ones. According to conventional wisdom, this calls for R&D subsidies. This paper develops a quality-ladder growth model with overlapping generations which evaluates the positive and normative implications of R&D subsidies and compares them with the effects of public education policy to promote R&D. Unlike standard growth models, the proposed framework accounts for the specificity of science and engineering (S&E) skills, where individuals endogenously choose the type of education, and allows for heterogeneity in individual ability. Although intertemporal knowledge spillovers are hypothesized and negative R&D externalities are absent, the analysis shows somewhat surprisingly that R&D subsidies may be detrimental to both productivity growth and welfare, in contrast to publicly provided education targeted to S&E skills. Finally, the optimal structure of public education spending on different skills is examined.

education policy, endogenous growth, R&D subsidies, scientists and engineers, skill specificity

Abstract:
This paper develops a model in which the interaction of entrepreneurial investments and power of the owners of land or other natural resources determines structural change and economic development. A more equal distribution of natural resources promotes structural change and growth through two channels: First, by weakening oligopsony power of owners and thereby easing entrepreneurial investments for credit-constrained individuals whose investment possibilities depend on their income earned in the primary goods sector. Second, by shifting the distribution of political power from resource owners towards the entrepreneurial elite, resulting in economic policy and institutions which are more conducive to entrepreneurship and productivity progress. We argue that these hypotheses are consistent with a large body of historical evidence from the Americas and with evidence on transition economies.

credit constraints, distribution, economic development, entrepreneurship, institutions, oligopsony power, political elites

Abstract:
This paper demonstrates that the role of the personal income distribution for an economy's process of development fueled by human capital accumulation critically depends on the shape of the saving function. Empirical evidence for the U.S. strongly suggests that the marginal propensity to save is increasing in income for income levels above a threshold, a property which so far has not been allowed for in the literature on human capital, income distribution and macroeconomics. Doing so, the present analysis suggests that the impact of higher inequality on the aggregate human capital stock, and thus, on growth is positive under rather weak conditions. Results heavily rely on a positive impact of parents' income on children's human capital investments, which holds under standard assumptions on labor income risk and risk aversion in the model, and is largely supported by empirical evidence.

growth, income distribution, intergenerational transfers, risky education, saving function

Abstract:
This paper uses a two-country model with integrated markets for high-skilled labor to analyze the opportunities and incentives for national governments to provide higher education. Countries can differ in productivity, and education is financed through a wage tax, so that brain drain affects the tax base and has agglomeration effects. We study unilateral possibilities for triggering or avoiding brain drain and compare education policies and migration patterns in non-cooperative political equilibria with the consequences of bilateral cooperation between countries. We thereby demonstrate that bilateral coordination tends to increase public education expenditure compared to non-cooperation. At the same time, it aims at preventing migration. This is not necessarily desirable from the point of view of a social planner who takes account of the interests of migrants.

brain drain, educational choice, public education policy, locational competition

Abstract:
According to a standard argument, higher income inequality fosters redistributive activities of the government in favor of the median income earner. This paper shows that if redistribution is achieved by a public provision of goods and services rather than by transfers, higher income inequality may imply a smaller size of the government in majority voting equilibrium. In addition to a static voting model, an endogenous growth model is analyzed to examine the role of saving decisions of heterogeneous individuals for both the distributional incidence of proportional factor income taxes and the voting outcome.

Income Distribution, Public Consumption, Majority Voting, Investment-driven Growth

Abstract:
This paper examines the impact of capital market integration (CMI) on higher education and economic growth. We take into account that participation in higher education is non-compulsory and depends on individual choice. Integration increases (decreases) the incentives to participate in higher education in capital-importing (-exporting) economies, all other things equal. Increased participation in higher education enhances productivity progress and is accompanied by rising wage inequality. From a national policy point of view, education expenditure should increase after integration of similar economies. Using foreign direct investment (FDI) as a measure for capital flows, we present empirical evidence which largely confirms our main hypothesis: An increase in net capital inflows in response to CMI raises participation in higher education and thereby fosters economic growth. We apply a structural estimation approach to fully track the endogenous mechanisms of the model.

capital mobility, capital-skill complementarity, educational choice, education policy, economic growth, wage income inequality

Abstract:
Inheritance taxes may induce heirs to discontinue family firms. Because firm dissolution incurs transaction costs, a preferential tax treatment of transferred family businesses seems to be desirable from a macroeconomic viewpoint. The support of dynastic succession, however, entails also a cost on the economy if firm continuation by less able heirs prevents entry into entrepreneurship. Here, we investigate analytically and quantitatively the trade-off between transaction costs saved and creative destruction prevented. We find that a unique general equilibrium exists at which, depending on the institutional setup, low-ability heirs either abandon (Type 1) or continue (Type 2) a family business. A calibration of the model with German data suggests that preferential tax treatment of family firms has severe negative consequences on macroeconomic performance if it causes a threshold crossing from Type 1 to Type 2 equilibrium. It also reveals that the targeted persons, i.e. the entrepreneurs that are caused to continue a business, always lose relative to their status in an economy without continuation-friendly tax policy.

bequest taxation, creative destruction, entrepreneurship, family firms, preferential tax treatment

Abstract:
Inheritance taxes may induce heirs to discontinue family firms. Because firm dissolution incurs transaction costs, a preferential tax treatment of transferred family businesses seems to be desirable from a macroeconomic viewpoint. The support of dynastic succession, however, entails also a cost on the economy if firm continuation by less able heirs prevents entry into entrepreneurship. Here, we investigate analytically and quantitatively the trade-off between transaction costs saved and creative destruction prevented. We find that a unique general equilibrium exists at which, depending on the institutional setup, low-ability heirs either abandon (Type 1) or continue (Type 2) a family business. A calibration of the model with German data suggests that preferential tax treatment of family firms has severe negative consequences on macroeconomic performance if it causes a threshold crossing from Type 1 to Type 2 equilibrium. It also reveals that the targeted persons, i.e., the entrepreneurs that are caused to continue a business, always lose relative to their status in an economy without continuation-friendly tax policy.

Bequest Taxation, Creative Destruction, Entrepreneurship, Family Firms, Preferential Tax Treatment

Abstract:
Altruistic parents may transfer resources to their offspring by providing education, and by leaving bequests. We show that in the presence of wage taxation, a small bequest tax may improve efficiency in an overlapping-generations framework with only intended bequests, by enhancing incentives of parents to invest in their children's education. This result holds even if the wage tax rate is held constant when introducing bequest taxation. We also calculate an optimal mix of wage and bequest taxes with alternative parameter combinations. In all cases, the optimal wage tax rate is clearly higher than the optimal bequest tax rate, but the latter is generally positive when the required government revenue in the economy is sufficiently high.

bequest taxation, bequests, education, Pareto improvement

Abstract:
Two trends have marked the politico-economic discussion in many industrialized countries in recent years. On the one hand, international production, workplace decentralization, shareholder orientation and generous manager remuneration have changed the face of firms in the primary economy. On the other hand, there is increased pressure on the secondary labor market revealed by unemployment or declining wages of low-skilled workers. This paper establishes a causal relationship between the two trends by developing a model in which labor market segmentation stems from the fact that organizational labor (management) is a key element in the primary, but not in the secondary economy. We also evaluate the effectiveness of selective immigration policies for high-skilled workers (green card).

Dual Labor Market, Reorganization of Work, Organizational Labor, International Competition, Green Card

Abstract:
This paper theoretically and empirically analyzes the interaction of emigration of highly skilled labor, an economy's income gap to potential host economies of expatriates, and optimal public infrastructure investment. In a model with endogenous education and R&D investment decisions we show that international integration of the market for skilled labor aggravates between-country income inequality by harming those which are source economies to begin with while benefiting host economies. When brain drain increases in source economies, public infrastructure investment is optimally adjusted downward, whereas host economies increase it. Evidence from 77 countries well supports our theoretical hypotheses.

brain drain, cross-country evidence, educational choice, public infrastructure investment, R&D investment

Abstract:
We develop a dynamic two-party political economy framework, in which parties seek to maximize vote share and face the trade-off between catering to their respective core constituencies on the one hand and "middle of the road" voters with no partisan affiliation on the other hand. In contrast to ideology-driven individuals, "middle of the road" voters care about the state of the economy in the sense that a policy reform is desirable for them when the fundamentals of the economy change. However, information is "sticky" in the sense that the process of information diffusion about the state of the economy, which is determined by some exogenous stochastic process, is imperfect. Contrary to conventional wisdom, we show that an increase in ideological polarization may enhance social welfare by mitigating the friction in information flow.

ideological polarization, sticky information, partisanship, policy reform

Abstract:
This paper develops a quality-ladder model of endogenous growth to study the interplay between in-house R&D and marketing expenditure. Although promotional activity is modelled as purely wasteful competition among firms for attention, it unambiguously fosters innovation activity of firms, and possibly, leads to faster growth. This result rests on two premises which are consistent with empirical evidence. First, if firms incur higher sunk costs for marketing, concentration and firm sizes rise. Second, firm size and R&D expenditure are positively related. As a result, R&D investments per firm may even become excessive, whereas being inefficiently low in the benchmark case without marketing. This has non-trivial consequences for the socially optimal policy design with respect to R&D subsidies and entry incentives.

Contest for Attention, Endogenous Growth, Innovation Activity, Marketing, R&D Subsidies, Scale Effects

Abstract:
This paper argues that endogenous restructuring processes within firms towards non-routine tasks like autonomous problem-solving and other analytical activities, triggered by advances in information and communication technologies (ICT) and rising supply of educated workers, are associated with an increase of wage inequality within education groups, possibly accompanied by a decline or stagnation of between-group wage dispersion. The mechanisms proposed in this research are not only consistent with the evolution of the distribution of wages in advanced countries, but also the evolution of workforce composition in firms and a frequently confirmed complementarity between skill-upgrading, new technologies and knowledge-based work organization.

Non-routine tasks, Skill supply, Technological progress, Unobserved abilities, Within-group wage inequality

Abstract:
Incumbent firms have two basic possibilities to improve their competitive position in the product market: investment in R&D and the creation of entry barriers to the disadvantage of potential rivals, e.g. through lobbying activities, campaign contributions, bribes or the adoption of incompatible technologies. This paper proposes a simple oligopoly model which raises the possibility that such anti-competitive conduct and R&D investment are complementary activities for incumbents. Consequently, an institutional framework or technological possibilities which encourage anti-competitive conduct, although impeding entry of potential rivals and accentuating standard oligopoly distortions, may foster R&D-based growth and welfare. However, this outcome is less likely if entrants exert technological spillover effects, e.g. through foreign direct investment. Stronger protection of intellectual property rights, although triggering anti-competitive conduct and thereby impeding market entry as well, is more likely to foster economic growth.

anti-competitive conduct, in-house R&D, economic growth, entry barriers, knowledge spillovers

Abstract:
This paper develops a tractable general equilibrium model with multiple market locations in which the interplay between product markets and the market for managerial skills determines both the size distribution of firms and top wage income shares. Despite ex ante symmetry of potential entrants, the analysis suggests that skewness in the distributions of firm size and wages naturally arises when differences among firms in productivity or product quality become increasingly magnified in profit differences, a property which is inherent in standard models of imperfect competition. Results are also consistent with a positive relationship of firm size to both productivity and profitability. Moreover, the analysis suggests that lean management is associated with high wages at the top, whereas a decline in set up costs to enter markets has inconclusive effects on inequality.

Asymmetric equilibrium, Firm size, Intangible assets, Job assignment, Monopolistic competition, Top wage incomes

Abstract:
R growth theory suggests that a larger population size raises either the long-run rate of economic growth ("strong scale effect") or the level of per capita income ("weak scale effect"), with far-reaching policy implications. However, for modern times there is little empirical support for strong scale effects and evidence in favor of weak scale effects is mixed, at best. This paper develops a simple overlapping-generations framework with endogenous occupational choice of heterogeneous agents and entrepreneurial innovations in which any form of scale effect is absent. A higher population growth rate has a negligible, possibly negative effect on the long-run growth rate of per capita income. Long-run growth is sustained also in absence of population growth and generally is policy-dependent.

economic growth, endogenous technical change, entrepreneurial skills, population growth, scale effects

Abstract:
R&D-based growth theory suggests that a larger population size raises either the long-run rate of economic growth ("strong scale effect") or the level of per capita income ("weak scale effect"), with far-reaching policy implications. However, for modern times there is little empirical support for strong scale effects and evidence in favor of weak scale effects is mixed, at best. This paper develops a simple overlapping-generations framework with endogenous occupational choice of heterogeneous agents and entrepreneurial innovations in which any form of scale effect is absent. A higher population growth rate has a negligible, possibly negative effect on the long-run growth rate of per capita income. Long-run growth is sustained also in absence of population growth and generally is policy-dependent.

economic growth, endogenous technical change, entrepreneurial skills, population growth, scale effects

Abstract:
This paper develops a two-sector general equilibrium model in which firms in the primary economy have to create workplaces prior to production and product market competition. For this, we introduce the endogenous sunk cost approach with two-stage decisions of firms from IO in the macro-labor literature. By hypothesizing that technological change has lowered marginal costs but has raised organizational requirements for installing workplaces, we are capable to explain downsizing of low-skilled jobs in the primary economy despite wage flexibility ex ante. This leads to more accentuated labor market segmentation, i.e. an increase in wage pressure in the secondary economy.

Dual Labor Market, Endogenous Sunk Costs, Organizational Labor, Segregation, Workplace

Abstract:
This paper examines the role of religious denomination for human capital formation. We employ a unique data set which covers, inter alia, information on numerous measures of school inputs in 169 Swiss districts for the years 1871/72, 1881/82 and 1894/95, marks from pedagogical examinations of conscripts (1875-1903), and results from political referenda to capture conservative or progressive values in addition to the cultural characteristics language and religion. Catholic districts show on average significantly lower educational performance than Protestant districts. However, accounting for other sociocultural characteristics qualifies the role of religion for educational production. The evidence suggests that Catholicism is harmful only in a conservative milieu. We also exploit information on absenteeism of pupils from school to separate provision of schooling from use of schooling.

culture, educational production, plural identity, religious denomination, school inputs

Abstract:
This paper examines the role of religious denomination for human capital formation. We employ a unique data set which covers, inter alia, information on numerous measures of school inputs in 169 Swiss districts for the years 1871/72, 1881/82 and 1894/95, marks from pedagogical examinations of conscripts (1875-1903), and results from political referenda to capture conservative or progressive values in addition to the cultural characteristics language and religion. Catholic districts show on average significantly lower educational performance than Protestant districts. However, accounting for other sociocultural characteristics qualifies the role of religion for educational production. The evidence suggests that Catholicism is harmful only in a conservative milieu. We also exploit information on absenteeism of pupils from school to separate provision of schooling from use of schooling.

culture, educational production, plural identity, religious denomination, school inputs

Abstract:
We examine the relationship between the supply of skilled labor, technological change and relative wages. In accounting for the role of skilled labor in both production activities and productivity-enhancing 'support' activities we derive the following results. First, an increase in the supply of skilled labor raises the employment share of non-production labor within firms, without lowering relative wages. Second, new technologies raise wage inequality only in so far as they give incentives to firms to reallocate skilled labor towards non-production activities. In contrast, skill-biased technological change of the sort usually considered in the literature does not affect wage inequality.

Abstract:
This paper develops a quality-ladder model of endogenous growth to study the interplay between in-house R&D and combative advertising expenditure, and its implications for economic growth, firm size, and welfare. The analysis shows that, somewhat surprisingly, higher incentives to engage in advertising, although combative, unambiguously foster innovation activity of firms. This, possibly, leads to faster growth and even higher welfare. These results rest on two features of the model which are well-supported by empirical evidence. First, if firms incur higher sunk costs for marketing, concentration and firm size rise. Second, firm size and R&D expenditure are positively related as larger firms are able to spread R&D costs over higher sales. The analysis also suggests that R&D subsidies are conducive to R&D and growth without inducing firms to raise advertising outlays.

O31, O40, L16