Monopoly rights can reduce income big time

We ask which part of the observed cross-country differences in the level of per capita income can be accounted for by monopoly rights in the labour market. We answer this question in a calibrated growth model with two final goods sectors. The novel feature being that monopoly rights in the capital-producing sector shield insiders from competition by outsiders and permit coalitions of insiders to choose inefficient technologies or working practices. We find that monopoly rights can lead to quantitatively much larger reductions in the level of per capita income than previously demonstrated. This comes about because they do not only reduce TFP in capital-producing sector but also increase the relative price of capital. This reduces the capital-labour ratio in the whole economy. The implied predictions about the price of capital goods relative to consumption goods and the investment share in output are quantitatively consistent with the cross-country facts.cross-country income differences, cross-country productivity differences, monopoly rights, relative price of capital, capital accumulation.

Determinacy Through Intertemporal Capital Adjustment Costs

It is well known that if mild sector–specific externalities are considered, then the steady state of the standard two-sector real business cycle model can become locally indeterminate and endogenous business cycles can arise. We show that this result is not robust to the introduction of standard intertemporal capital adjustment costs, which may accrue when total capital is adjusted or when each sector’s capital is adjusted. We find for both forms of adjustment costs that the steady state is determinate for all empirically plausible parameter values. We also find that determinacy occurs for a much larger range of parameter values when adjusting each sector’s capital is costly.capital adjustment costs; determinacy; local indeterminacy; local stability; sector-specific externality

Neoclassical Growth Model with Externalities

This paper explores the local stability properties of the steady state in the twosector neoclassical growth model with sector–specific externalities. We show analytically that capital adjustment costs of any size preclude local indeterminacy nearby the steady state for every empirically plausible specification of the model parameters. More specifically, we show that when capital adjustment costs of any size are considered, a necessary condition for local indeterminacy is an upward-sloping labor demand curve in the capital-producing sector, which in turn requires an implausibly strong externality. We show numerically that capital adjustment costs of plausible size imply determinacy nearby the steady state for empirically plausible specifications of the other model parameters. These findings contrast sharply with the previous finding that local indeterminacy occurs in the two-sector model for a wide range of plausible parameter values when capital adjustment costs are abstracted from.capital adjustment costs; determinacy; externality; local indeterminacy; stability.

Determinacy with Capital Adjustment - Costs and Sector-Specific Externalities

This paper explores the stability properties of the steady state in the standard two-sector real business cycle model with a sector-specific externality in the capital-producing sector. When the steady state is stable then equilibrium is indeterminate and stable sunspots are possible. We find that capital adjustment costs of any size preclude stable sunspots for every empirically plausible specification of the model parameters. More specifically, we show that when capital adjustment costs of any size are considered, a necessary condition for the existence of stable sunspots is an upward- sloping labor demand curve in the capital-producing sector, which in turn requires an implausibly strong externality. This result contrasts sharply with the standard result that when we abstract from capital adjustment costs, stable sunspots occur in the two-sector model for a wide range of plausible parameter values.capital adjustment costs, determinacy, indeterminacy, sector-specific externality, sunspots

Which Sectors Make the Poor Countries so Unproductive?

Standard growth accounting exercises find large cross-country differences in aggregate TFP. Here we ask whether specific sectors are driving these differences, and, if this is the case, which these problem sectors are. We argue that to answer these questions we need to consider four sectors. In contrast, the literature typically considers only two sectors. Our four sectors produce services (nontradable consumption), consumption goods (tradable consumption), construction (nontradable investment), and machinery and equipment (tradable investment). Interacting the data from the 1996 benchmark study of the Penn World Tables with economic theory, we find that the TFP differences across countries are much larger in the two tradable sectors than in the two nontradable sectors. This is consistent with the Balassa-Samuelson hypothesis. We also find that within the tradable sectors the TFP differences are much larger in machinery and equipment than in consumption goods. We illustrate the usefulness of our findings by accounting for the conflicting results of the existing two-sector analyses and by developing criteria for a successful theory of aggregate TFP.development accounting; sector TFPs; relative prices

Measuring Factor Income Shares at the Sectoral Level

Many applications in economics use multi-sector versions of the growth model. In this paper, we measure the income shares of capital and labor at the sectoral level for the U.S. economy. We also decompose the capital shares into the income shares of land, structures, and equipment. We find that the capital shares differ across sectors. For example, the capital share of agriculture is more than two times that of construction and more than 50% larger than that of the aggregate economy. Moreover, agriculture has by far the largest land share, which mostly explains why it has the largest capital share. Our numbers can directly be used to calibrate standard multi-sector models. Alternatively, if one wants to abstract from differences in sector capital shares, our numbers can be used to establish that this is not crucial for the results.input-output tables; industry-by-commodity total requirement matrix; sector factor shares

Ruling out multiplicity and indeterminacy: The role of heterogeneity.

It is well known that economies of scale that are external to the individual decision makers can lead to self-fulfilling prophecies and the multiplicity or even indeterminacy of equilibrium. We argue that the importance of this source of multiplicity and indeterminacy is overstated in representative agent models, as they ignore the potential stabilizing effect of heterogeneity. We illustrate this point in a version of Matsuyama' s (1991) two-sector model with increasing returns to scale. Two main results are shown. First, sufficient homogeneity with respect to individual productivity leads to the instability and non-uniqueness of a given stationary state and the indeterminacy of equilibrium at that stationary state. Second, sufficient heterogeneity leads to the global saddle-path stability and the uniqueness of a given stationary state and the global uniqueness of equilibrium.Heterogeneity; increasing returns to scale; indeterminacy; stability; uniqueness;

Neoclassical Growth Model with Externalities

This paper explores the local stability properties of the steady state in the twosector neoclassical growth model with sectorspecific externalities. We show analytically that capital adjustment costs of any size preclude local indeterminacy nearby the steady state for every empirically plausible specification of the model parameters. More specifically, we show that when capital adjustment costs of any size are considered, a necessary condition for local indeterminacy is an upward-sloping labor demand curve in the capital-producing sector, which in turn requires an implausibly strong externality. We show numerically that capital adjustment costs of plausible size imply determinacy nearby the steady state for empirically plausible specifications of the other model parameters. These findings contrast sharply with the previous finding that local indeterminacy occurs in the two-sector model for a wide range of plausible parameter values when capital adjustment costs are abstracted from

Structural change and regional convergence: the case of declining transport costs

Regional income inequality within countries is an important contributor to global income inequality. I investigate its relationship with structural change and growth using the historical experience of the United States since 1880. Specifically, I modify an existing multi-sector general equilibrium growth model and highlight two important forces: (1) structural change, which disproportionately benefit poor agricultural regions; and (2) transport cost reductions, which shrinks regional price and wage differences. Consistent with existing research, structural change accounts for the Southern states’ convergence to the Northeast. In contrast, I find reductions in transport costs offset the nominal income gains from structural change for the Midwestern states. The Midwest case is of greater relevance for developing countries, given their high internal transportation costs. These results suggest growth in developing countries may not significantly reduce global income inequality.Structural change; income convergence; dual-economy