US-Europe Differences in Technology-Driven Growth: Quantifying the Role of Education

European economic growth has been weak, compared to the US, since the 80s. In previous work (Krueger and Kumar, 2003), we argued that the European focus on specialized, vocational education might have been effective during the 60s and 70s, but resulted in a growth gap relative to the US during the subsequent information age, when new technologies emerged more rapidly. In this paper, we extend our framework to assess the quantitative importance of education policy, when compared to labor market rigidity and product market regulation, other policy differences more commonly suggested to be responsible for US-Europe differences. A assigns a major role to education policy in explaining US-Europe growth differences.

Inner multipliers and Rudin type invariant subspaces

Let $\mathcal{E}$ be a Hilbert space and $H^2_{\mathcal{E}}(\mathbb{D})$ be the $\mathcal{E}$-valued Hardy space over the unit disc $\mathbb{D}$ in $\mathbb{C}$. The well known Beurling-Lax-Halmos theorem states that every shift invariant subspace of $H^2_{\mathcal{E}}(\mathbb{D})$ other than $\{0\}$ has the form $\Theta H^2_{\mathcal{E}_*}(\mathbb{D})$, where $\Theta$ is an operator-valued inner multiplier in $H^\infty_{B(\mathcal{E}_*, \mathcal{E})}(\mathbb{D})$ for some Hilbert space $\mathcal{E}_*$. In this paper we identify $H^2(\mathbb{D}^n)$ with $H^2(\mathbb{D}^{n-1})$-valued Hardy space $H^2_{H^2(\mathbb{D}^{n-1})}(\mathbb{D})$ and classify all such inner multiplier $\Theta \in H^\infty_{\mathcal{B}(H^2(\mathbb{D}^{n-1}))}(\mathbb{D})$ for which $\Theta H^2_{H^2(\mathbb{D}^{n-1})}(\mathbb{D})$ is a Rudin type invariant subspace of $H^2(\mathbb{D}^n)$.Comment: 8 page

Entry Costs, Intermediation, and Capital Flows

In this paper, we reexamine the question "Why doesn't capital flow from rich to poor countries?" posed, most recently, by Lucas (1990). We build a simple contracting framework where costly intermediation together with an adverse selection problem have quantitatively important effects on capital flows. When intermediation costs are ignored, the model behaves much like the neoclassical model in terms of capital returns. However, when intermediation costs are considered, the return for a given amount of capital can be non-monotonic in costs. Therefore, the combination of capital and cost differences across countries gives rise to a rich variation of returns, one that suggests a tendency for capital to flow to middle income countries, as seen in data. Indeed, when we embed the static return function in a two-country dynamic model, there is capital outflow from a poor country that removes capital controls and becomes open. We find that even though the closed economy dominates in terms of capital employed in production, it is the open economy that dominates in terms of income, consumption and welfare.Capital flows, Financial intermediation

Inappropriate Technology

In this paper, we investigate incentives other than altruism that developed countries have in improving technologies specific to developing countries. We propose a simple model of international trade between two regions, in which all individuals have similar preferences over an inferior good and a luxury good. The poor region has a comparative advantage in the production of the inferior good, and the rich in the luxury good. Even when costly adaptation of the technology to the poor region's characteristics is required -- which makes the technology inappropriate for local use -- we show that there are parameter configurations for which the rich region has an incentive to incur this cost. By raising the efficiency of the productive process of the developing region, the developed region can redirect its own productive resources toward the luxury good; it can also gain access to a more diversified set of consumption choices. Indeed, there are cases where the rich region would prefer to improve the poor region's technology for producing the inferior good rather than its own. Such technology transfers can increase the welfare of both regions. We apply our model to the Green Revolution and provide a quantitative assessment of its welfare effects.Technology improvements, Dynamic trade models, Welfare analysis