50 research outputs found

    Evaluating Explanations for Stagnation

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    In this paper, we evaluate four explanations for economic stagnation that have been proposed in the literature: coordination failures, ineffective mix of occupational choices, insufficient human capital accumulation, and politico-economic considerations. We calibrate models that embody these explanations in the context of the stagnant economies of sub-Saharan Africa. The methodology of calibration is ideally suited for this evaluation, given the paucity of high-quality data, the high degree of model nonlinearity, and the need for conducting counterfactual policy experiments. In addition to studying how closely and robustly these models capture the African situation, we examine the quantitative aspects of their policy implications. We find that calibrations that yield multiple equilibria -- one prosperity and the other stagnation -- are not particularly robust. This tempers optimism about the efficacy of one-shot or temporary development policies suggested by models with multiplicity. However, the calibrated models indicate that small policy interventions are sufficient to trigger development in stagnant economies.Coordination failure, Occupational choice, Human capital accumulation, Political economy, Economic Development, Calibration.

    Higher Education Subsidies and Heterogeneity, A Dynamic Analysis

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    In this paper, we develop a simple dynamic general equilibrium framework that can be used to study issues in higher education policy. The model features heterogeneity in income of parents and academic ability of students. Liquidity constraints create persistence in educational attainment even when ability is independently distributed. A unique steady state with a positive fraction of college educated workers, or one with a development trap, or multiple steady states which feature both of these, can result in equilibrium. We add a government that is equipped with a simple tax scheme and calibrate the model to the US economy to get a benchmark for our policy analysis. The government can design a tax and subsidy scheme that guarantees equality of opportunity, but only at the expense of a decrease in the efficiency of utilization of education resources; the welfare gain is minimal. A policy that aims to maximize the fraction of college-educated labor, by sending as many children as possible to college, results in a big drop in the above-mentioned efficiency with little or no welfare gain. If the government has the political will to use any available signal on ability and provide merit-based aid, it can increase this efficiency with little decrease in welfare. Education subsidies may be a potent tool for countries that are caught in a development trap; a sufficient level of subsidy can cause the economy to emerge from the trap.Dynamic General Equilibrium, Education, College Subsidies

    Education Policies to Revive a Stagnant Economy: The Case of Sub- Saharan Africa

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    In this paper, we argue that the condition of education and the economy of the low performing sub-Saharan African countries can be characterized as a stagnant steady state -- a "trap". We present a simple heterogeneous-agent model in which high costs of education relative to income and the skill premium can cause the economy to be trapped in such a steady state with minimal educational attainment. We calibrate the model to available data from the sub-Saharan African countries to study policies that could potentially free these trapped economies and set them on a path to a higher steady state. We find that a tax and subsidy scheme that redistributes resources at the trap from poor households with lower ability children to those with higher ability children can pry the economy out of the trap, thus freeing it from dependence on foreign aid in order to achieve the same goal. In addition to the direct cost, a portion of the indirect cost also needs to be subsidized. Moreover, such a policy outperforms the abolition of child labor and the institution and enforcement of compulsory education laws when expenditure neutral welfare comparisons are made.Dynamic heterogeneous-agent models, Economic stagnation, Education subsidies, Calibration of a trap

    2017-03 Early and Late Human Capital Investments, Borrowing Constraints, and the Family

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    We develop a dynastic human capital investment framework to study the importance of potential market failures - family borrowing constraints and uninsured labor market risk - as well as the process of intergenerational ability transmission in determining human capital investments in children at different ages. We explore the extent to which policies targeted to different ages can address these market failures, potentially improving economic efficiency and equity. We show that dynamic complementarity in investment and the timing of borrowing constraints are critical for the qualitative nature of investment responses to income and policy changes. Based on these analytical results, we use data from the Children of the NLSY (CNLSY) to establish that borrowing constraints bind for at least some families with young and old children. Calibrating our model to fit data from the CNLSY, we find a moderate degree of dynamic complementarity in investment and that 12% of young and 14% of old parents borrow up to their limits. While the effects of relaxing any borrowing limit at a single stage of development are modest, completely eliminating all lifecycle borrowing limits dramatically increases investments, earnings, and intergenerational mobility. Additionally, the impacts of policy or family income changes at college-going ages are substantially greater when anticipated earlier, allowing early investments to adjust. Finally, we show that shifting the emphasis of investment subsidies from college-going ages to earlier ages increases aggregate welfare and human capital

    The Farm, the City and the Emergence of Social Security

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    In this paper we study the social, demographic and economic origins of social security. The data for the U.S. and for a cross section of countries make it clear that urbanization and industrialization are strongly associated with the rise of social insurance. We describe a model economy in which demographics, technology, and social security are linked together. We study an economy with two locations (sectors), the farm (agricultural) and the city (industrial). The decision to migrate from rural to urban locations is endogenous and linked to productivity differences between the two locations and survival probabilities. Furthermore, the level of social security is determined by majority voting. We show that a calibrated version of this economy is consistent with the historical transformation in the United States. Initially a majority of voters live on the farm and do not want to implement social security. Once a majority of the voters move to the city, the median voter prefers a positive social security tax. In the model social security emerges and is sustained over time as a political and economic equilibrium. Modeling the political economy of social security within a model of structural change leads to a rich economic environment in which the median voter is identified by both age and location

    Does the progressivity of taxes matter for economic growth?

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    A sizeable literature has argued that the growth effects of changes in flat rate taxes are small. In this paper, we investigate the relatively unexplored area of the growth effect of changes in the tax structure, in particular, in the progressivity of taxes. Considering such a tax reform seems empirically more relevant than considering changes in flat tax rates. We construct a general equilibrium model of endogenous growth in which there is heterogeneity in income and in the tax rates. We limit heterogeneity to two types, skilled and unskilled, and posit that the probability of staying or becoming skilled in the subsequent period depends positively on expenses on "teacher" time. In the production sector, we consider two sources of growth. In the first, growth arises as a purely external effect on account of production activities of skilled workers. In the second, a portion of the skilled workforce is used to work in research and other productivity enhancing activities and is compensated for it. Our analysis shows that changes in the progressivity of tax rates can have positive growth effects even in situations where changes in flat rate taxes have no effect. Experiments on a calibrated model indicate that the quantitative effects of moving to a flat rate system are economically significant. The assumption made about the engine of growth has an important effect on the impact of a change in progressivity. Quantitatively, welfare is unambiguously higher in a flat rate system when comparisons are made across balanced growth equilibria; however, when the costs of transition to the higher growth equilibrium is taken into account only the currently rich slightly prefer the flat rate system.Taxation ; Economic development

    The Farm, the City, and the Emergence of Social Security

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    During the period from 1880 to 1950, publicly managed retirement security programs became an important part of the social fabric in most advanced economies. In this paper we study the social, demographic and economic origins of social security. We describe a model economy in which demographics, technology, and social security are linked together. We study an economy with two locations (sectors), the farm (agricultural) and the city (industrial). The decision to migrate from rural to urban locations is endogenous and linked to productivity differences between the two locations and survival probabilities. Furthermore, the level of social security is determined by majority voting. We show that a calibrated version of this economy is consistent with the historical transformation in the United States. Initially a majority of voters live on the farm and do not want to implement social security. Once a majority of the voters move to the city, the median voter prefers a positive social security tax, and social security emerges.

    The Farm, the City, and the Emergence of Social Security

    Get PDF
    In this paper we study the social, demographic and economic origins of social security. The data for the U.S. and for a cross section of countries make it clear that urbanization and industrialization are strongly associated with the rise of social insurance. We describe a model economy in which demographics, technology, and social security are linked together. We study an economy with two locations (sectors), the farm (agricultural) and the city (industrial). The decision to migrate from rural to urban locations is endogenous and linked to productivity differences between the two locations and survival probabilities. Furthermore, the level of social security is determined by majority voting. We show that a calibrated version of this economy is consistent with the historical transformation in the United States. Initially a majority of voters live on the farm and do not want to implement social security. Once a majority of the voters move to the city, the median voter prefers a positive social security tax. In the model social security emerges and is sustained over time as a political and economic equilibrium. Modeling the political economy of social security within a model of structural change leads to a rich economic environment in which the median voter is identified by both age and location.social security, political economy, structural change, migration

    Early and late human capital investments, borrowing constraints, and the family

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    This paper investigates the importance of family borrowing constraints in determining human capital investments in children at early and late ages. We begin by providing new evidence from the Children of the NLSY (CNLSY) which suggests that borrowing constraints bind for at least some families with young children. Next, we develop an intergenerational model of lifecycle human capital accumulation to study the role of early versus late investments in children when credit markets are imperfect. We analytically establish the importance of dynamic complementarity in investment for the qualitative nature of investment responses to income and policy changes. We extend the framework to incorporate dynasties and use data from the CNLSY to calibrate the model. Our benchmark steady state suggests that roughly half of young parents and 12% of old parents are borrowing constrained, while older children are unconstrained. We also identify strong complementarity between early and late investments, suggesting that policies targeted to one stage of development tend to have similar effects on investment in both stages. We use this calibrated model to study the effects of education subsidies, loans and transfers offered at different ages on early and late human capital investments and subsequent earnings in the short-run and long-run. A key lesson is that the interaction between dynamic complementarity and early borrowing constraints means that early interventions tend to be more successful than later interventions at improving human capital outcomes
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