The Great Divergence: A Network Approach

We present a multi-country theory of economic growth in which countries are connected by a network of mutual knowledge exchange. Growth is generated through human capital accumulation and knowledge externalities. The available knowledge in any country depends on its connections to the rest of the world and on the human capital of the countries it is exchanging knowledge with. We show how the diffusion of knowledge through the world explains the evolution of global income inequality. It generates a Great Divergence, that is increasing world inequality after the take-off of the forerunners of the industrial revolution, followed by a Great Convergence, that is decreasing world inequality after the take-off of the latecomers of the industrial revolution. Knowledge diffusion through a Small World network produces an extraordinary diversity of individual growth experiences of initially identical countries including differentiated take-offs to growth as well as overtaking and falling behind in the course of world development

Life Expectancy and Education: Evidence from the Cardiovascular Revolution

This paper exploits the unexpected decline of deaths from cardiovascular diseases since the 1970s as a large positive health shock that affected predominantly old-age mortality; i.e., the fourth stage of the epidemiological transition. Using a differences-in-differences estimation strategy, we find that U.S. states with higher levels of cardiovascular-disease mortality prior the 1970s experienced greater increases in adultlife expectancy and higher education enrollment. Our estimates suggest that the cardiovascular revolution caused an increase in life expectancy of 1.5 years and an increase in education enrollment of 9 percentage points, i.e. 52 percent of the observed increase from 1960 to 2000

Smoking Kills: An Economic Theory of Addiction, Health Deficit Accumulation, and Longevity

In this paper I unify the economic theories of addiction and health deficit accumulation and develop a life cycle theory in which individuals take into account the fact that the consumption of addictive goods reduces their health and longevity. I distinguish two types of addiction: perfect and common. Individuals with perfect addiction perfectly control their addiction. Individuals with common addiction, though otherwise rational and forward looking, fail to fully understand how their addiction develops. I argue that the life cycle consumption pattern predicted for common addiction is more suitable for motivating empirically observable patterns of addictive goods consumption. I take the case of smoking as unhealthy behavior, calibrate the model with U.S. data, and apply it in order to investigate the life cycle patterns of smoking and quitting smoking and the socioeconomic gradients of unhealthy consumption and longevity

Technology, Trade, and Growth: The Role of Education

We generalize a trade model with firm-specific heterogeneity and R&D-based growth to allow for an endogenous education decision of households and an endogenously evolving population. Our framework is able to explain cross-country differences in living standards and trade intensities by the differential pace of human capital accumulation among industrialized countries. Consistent with the empirical evidence, scale matters for relative economic prosperity as long as countries are closed, whereas scale does not matter in a fully globalized world. Interestingly, however, the average human capital level of a country influences its relative economic prosperity irrespective of its trade-openness. While being consistent with the empirical evidence, our framework has the additional advantage that steady-state growth of income does not hinge on the unrealistic assumption of an ever expanding population

A hard nut to crack : regulatory failure shows how rating really works

Credit rating agencies such as Moody’s and Standard & Poor’s are key players in the governance of global financial markets. Given the very strong criticism the rating agencies faced in the wake of the global financial crisis 2008, how can we explain the puzzle of their survival? Market and regulatory reliance on ratings continues, despite the shift from a light-touch to a mandatory system of agency regulation and supervision. Drawing on the analysis of rating agency regulation in the US and the EU before and after the financial crisis, we argue that a pervasive, persistent and, in our view, erroneous understanding of rating has supported the never-ending story of rating agency authority. We show how treating ratings as metrics, private goods, and independent and neutral third-party opinions contributes to the ineffectiveness of rating agency regulation and supports the continuing authoritative standing of the credit rating agencies in market and regulatory practices

Going from Bad to Worse: Adaptation to Poor Health, Health Spending, Longevity, and the Value of Life

Aging humans adapt to their worsening state of health and old people are usually happier than estimated by young individuals. In this paper we investigate how adaptation to a deteriorating state of health affects health spending, life expectancy, and the value of life. We set up a a life cycle model in which individuals are subject to physiological aging, calibrate it with data from gerontology, and compare behavior and outcomes of adapting and non-adapting individuals. While adaptation generally increases the value of life (by about 2 to 5 percent), its impact on health behavior and longevity depends crucially on whether individuals are aware of their adaptive behavior

Facts and distortions in an endogenous growth model with physical capital, human capital and varieties

This article studies a model with physical and human capital accumulation and varieties. The model includes several distortions: duplication effects, spillovers, creative destruction, surplus appropriability, and an erosion effect. We show that the duplication effect in R&D is essential to make the model replicate several stylized facts linked with R&D. We evaluate the distance to the optimal solution, comparing the strength of each distortion.info:eu-repo/semantics/publishedVersio

Optimal Social Insurance and Health Inequality

This paper integrates into public economics a biologically founded, stochastic process of individual ageing. The novel approach enables us to quantitatively characterize the optimal joint design of health and retirement policy behind the veil of ignorance for today and in response to future medical progress. Calibrating our model to Germany, we find that future progress in medical technology calls for a potentially drastic increase in health spending that typically should be accompanied by a lower pension savings rate and a higher retirement age. Interestingly, medical progress and higher health spending are in conflict with the goal to reduce health inequality