On Capital Market Imperfections as a Source of Low TFP and Economic Rents

We propose a theory in which capital market imperfections are at the origin of cross-country TFP differences. In our theory entrepreneurs have private information about the multifactor productivity of their technology. We study how the contracting environment, as described by the ability to enforce contracts, affects the provision of incentives and resource allocation to and across entrepreneurs. Our theory implies that countries with a low ability to enforce contracts use inefficient technologies in equilibrium and are characterized by differences in productivity across industries. These implications of our theory are supported by the empirical evidence. Our theory also suggests that entrepreneurs have a vested interest in maintaining a status quo with low enforcement since it allows them to extract rents from the factor services they hire.Capital market imperfections; Total factor productivity, Relative price distortions; Taxation.

Optimal taxation in infinitely-lived agent and overlapping generations models : a review

Fiscal policy ; Taxation

On Capital Market Imperfections as an Origin of Low TFP and Economic Rents

We propose a theory where capital market imperfections are at the origin of cross-country TFP differences. In our theory entrepreneurs have private information about the multifactor productivity of their technology. We study how the contracting environment, as described by the ability to enforce contracts, affects the provision of incentives and, thus, resource allocation to and across entrepreneurs. We assume that countries differ in the ability to enforce contracts and show that, in the presence of assymmetric information, countries with low enforcement use inefficient technologies in equilibrium and are characterized by differences in productivity across industries. Our theory also suggests that entrepreneurs have a vested interest in maintaining a status quo with low enforcement since it allows them to extract rents from the factor services they hire.Capital Market Imperfections, Total Factor Productivity, Relative Price Distortions, Taxation

On Finance as a Theory of TFP, Cross-Industry Productivity Differences, and Economic Rents.

We develop a theory of capital-market imperfections to study how the ability to enforce contracts affects resource allocation across entrepreneurs of different productivities, and across industries with different needs for external financing. The theory implies that countries with a poor ability to enforce contracts are characterized by the use of inefficient technologies, low aggregate TFP, low development of financial markets, large differences in labor productivity across industries, and large employment shares in industries with low productivity. These implications of our theory are supported by the empirical evidence. The theory also suggests that entrepreneurs have a vested interest in maintaining a status quo with low enforcement since it allows them to extract rents from the factor services they hire.Macroeconmics, Capital Market Imperfections, Total-factor Productivity, Relative Prices, Sectorial Allocation, Limited Enforcement

A General Equilibrium Analysis of Parental Leave Policies

Despite mandatory parental leave policies being a prevalent feature of labor markets in developed countries, their aggregate effects in the economy are not well understood. To assess their quantitative impact, we develop a general equilibrium model of fertility and labor market decisions that builds on the labor matching framework of Mortensen and Pissarides (1994). We find that females gain substantially with generous policies but this benefit occurs at the expense of a reduction in the welfare of males. Leave policies have important effects on fertility, leave taking decisions, and employment. These effects are mainly driven by how the policy affects bargaining -- young females anticipate future states with higher threat points induced by the policy. Because the realization of these states depend on the decisions of females to give birth and take a leave, leave policies effectively subsidize fertility and leave taking. We also find that generous paid parental leaves can be an effective tool to encourage mothers to spend time with their children after giving birth.human capital; labor market equilibrium; parental leave policies; fertility; temporary separations

Labor Supply and Government Programs: A Cross-Country Analysis

There are substantial cross-country differences in labor supply late in the life cycle (age 50+). A theory of labor supply and retirement decisions is developed to quantitatively assess the role of social security, disability insurance, and taxation for understanding differences in labor supply late in the life cycle across European countries and the United States. The findings support the view that government policies can go a long way towards accounting for the low labor supply late in the life cycle in the European countries relative to the United States, with social security rules accounting for the bulk of these effects.Social security, disability insurance, labor supply, heterogeneity, life cycle

How Important is Human Capital? A Quantitative Theory Assessment of World Income Inequality

We develop a quantitative theory of human capital investment in order to evaluate the magnitude of cross-country differences in total factor productivity (TFP) that explains the variation in per-capita incomes across countries. We build a heterogeneous-agent economy with cross-sectional variation in ability, schooling, and expenditures on schooling quality. In our theory, the parameters governing human capital production and random ability process have important implications for a set of cross-sectional statistics - Mincer return, variance of earnings, variance of schooling, and intergenerational correlation of earnings. These restrictions of the theory and U.S. household data are used to pin down the key parameters driving the quantitative implications of the theory. Our main finding is that human capital accumulation strongly amplifies TFP differences across countries. In particular, we find an elasticity of output per worker with respect to TFP of 2.8: a 3-fold difference in TFP explains a 20-fold difference in output per worker. We argue that the cross-country differences in human capital implied by the theory are consistent with a wide array of evidence including earnings of immigrants in the United States, average mincer returns across countries, and the relationship between average years of schooling and per-capita income across countries. The theory implies that using Mincer returns to measure human capital understates differences across countries by a factor of 2.output per worker, TFP, human capital, heterogeneity, inequality

A General Equilibrium Analysis of Parental Leave Policies

An important feature of the U.S. labor market is that, even after controlling for measurable differences in education and experience, the average wage of women with children is 89 percent of the average wage of women without children. This ``family gap\\\" in wages accounts for almost half the gender gap in wages. Proponents of mandatory-leave policies argue that career interruptions associated with fertility have long-lasting effects on female employment and are costly in terms of human-capital losses for females. Despite the fact that mandatory leaves are widely applied in developed countries, their effects on the economy are not well understood. We develop and calibrate a general-equilibrium model of fertility and labor-market decisions to study the quantitative impact of such policies. We build on the Mortensen and Pissarides (1994) labor-market framework by introducing male and female workers, general and specific human-capital accumulation on the job, and temporary separations between the worker and a job. We find that: ($i$) the loss of specific human capital accounts for a small fraction of the wage gaps and ($ii$) mandatory-leave policies have substantial aggregate and redistributive effects on fertility, employment, and welfare. Interestingly, we find that the general-equilibrium effect of mandatory-leave policies is a reduction in the amount of time females spend at home with children.Parental leaves, fertility, specific human capital, temporary separations.

Towards a Micro-Founded Theory of Aggregate Labor Supply

We build a heterogeneous life-cycle model which captures a large number of salient features of individual labor supply, by education, over the life cycle. The model provides an aggregation theory of individual labor supply, firmly grounded on micro evidence, and is used to study the aggregate labor supply responses to changes in the economic environment. We find that the aggregate labor supply elasticity to a transitory wage shock is 1.27, with the extensive margin accounting for 54% of the response. Furthermore, we also simulate the 1987 tax holiday in Iceland - a quasi-natural experiment - and find that the aggregate labor supply responses in the model are similar to those actually observed in Iceland.Aggregate labor supply, intensive margin, extensive margin, heterogeneous agents, life cycle

How important is human capital? A quantitative theory assessment of world income inequality

We develop a quantitative theory of human capital investments in order to evaluate the magnitude of cross-country differences in total factor productivity (TFP) that explains the variation in per-capita incomes across countries. We build a heterogeneous-agent economy with cross-sectional variation in ability, schooling, and expenditures on schooling quality. By embedding our analysis in a growth model with tradable and non-tradable sectors, we model sectorial productivity differences across countries, as documented in Hsieh and Klenow (2007). The parameters governing human capital production and random ability and taste processes are restricted by a set of cross-sectional data moments such as variances and intergenerational correlations of earnings and schooling, as well as slope coefficient and R2 in a Mincer regression. Our main finding is that human capital accumulation strongly amplifies TFP differences across countries: To explain a 20-fold difference in the output per worker the model requires a 5-fold difference in the TFP of the tradable sector, versus an 18-fold difference if human capital is fixed across countries. Moreover, we find that sectorial productivity differences play a prominent role in quantitative implications of the theory.