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Creator: Hosseini, Roozbeh, Jones, Larry E., and Shourideh, Ali Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 674 Abstract:
We use an extended Barro-Becker model of endogenous fertility, in which parents are heterogeneous in their labor productivity, to study the efficient degree of consumption inequality in the long run. In our environment a utilitarian planner allows for consumption inequality even when labor productivity is public information. We show that adding private information does not alter this result. We also show that the informationally constrained optimal insurance contract has a resetting property—whenever a family line experiences the highest shock, the continuation utility of each child is reset to a (high) level that is independent of history. This implies that there is a non-trivial, stationary distribution over continuation utilities and there is no mass at misery. The novelty of our approach is that the no-immiseration result is achieved without requiring that the objectives of the planner and the private agents disagree. Because there is no discrepancy between planner and private agents' objectives, the policy implications for implementation of the efficient allocation differ from previous results in the literature. Two examples of these are: 1) estate taxes are positive and 2) there are positive taxes on family size.
Tema: H21 - Taxation and Subsidies: Efficiency; Optimal Taxation, D30 - Distribution: General, D63 - Equity, Justice, Inequality, and Other Normative Criteria and Measurement, D64 - Altruism; Philanthropy; Intergenerational Transfer, H23 - Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies, H43 - Project Evaluation; Social Discount Rate, and C61 - Optimization Techniques; Programming Models; Dynamic Analysis
Creator: Chari, V. V., Golosov, Mikhail, and Tsyvinski, Aleh Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 673 Abstract:
Innovative activities have public good characteristics in the sense that the cost of producing the innovation is high compared to the cost of producing subsequent units. Moreover, knowledge of how to produce subsequent units is widely known once the innovation has occurred and is, therefore, non-rivalrous. The main question of this paper is whether mechanisms can be found which exploit market information to provide appropriate incentives for innovation. The ability of the mechanism designer to exploit such information depends crucially on the ability of the innovator to manipulate market signals. We show that if the innovator cannot manipulate market signals, then the efficient levels of innovation can be implemented without deadweight losses–for example, by using appropriately designed prizes. If the innovator can use bribes, buybacks, or other ways of manipulating market signals, patents are necessary.
Palabra clave: Innovations, Mechanism design, Patents, Prizes, and Economic growth Tema: O31 - Innovation and Invention: Processes and Incentives, D86 - Economics of Contract: Theory, O34 - Intellectual Property and Intellectual Capital, D82 - Asymmetric and Private Information; Mechanism Design, O40 - Economic Growth and Aggregate Productivity: General, and D04 - Microeconomic Policy: Formulation, Implementation, and Evaluation
Creator: Luttmer, Erzo G. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 672 Abstract:
Suppose firms are subject to decreasing returns and permanent idiosyncratic productivity shocks. Suppose also firms can only stay in business by continuously paying a fixed cost. New firms can enter. Firms with a history of relatively good productivity shocks tend to survive and others are forced to exit. This paper identifies assumptions about entry that guarantee a stationary firm size distribution and lead to balanced growth. The range of technology diffusion mechanisms that can be considered is greatly expanded relative to previous work. High entry costs slow down the selection process and imply slow aggregate growth. They also push the firm size distribution in the direction of Zipf’s law.
Palabra clave: Productivity, Selection, Imitation, and Diffusion Tema: O30 - Innovation; Research and Development; Technological Change; Intellectual Property Rights: General and L10 - Market Structure, Firm Strategy, and Market Performance: General
Creator: McGrattan, Ellen R. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 671 Abstract:
Empirical studies quantifying the benefits of increased foreign direct investment (FDI) have been unable to provide conclusive evidence of a positive impact on the host country’s economic performance. I show that the lack of robust evidence is not inconsistent with theory, even if the gains to FDI openness are large. Anticipated welfare gains to increased inward FDI should lead to immediate declines in domestic investment and employment and eventual increases. Furthermore, since part of FDI is intangible investment that is expensed from company profits, gross domestic product (GDP) and gross national product (GNP) should decline during periods of abnormally high FDI investment. Using the model of McGrattan and Prescott (2009) and data from the IMF Balance of Payments to parameterize the time paths of FDI openness for each country in the sample, I do not find an economically significant relationship between the amount of inward FDI a country did over the period 1980—2005 and the growth in real GDP predicted by the model. This finding rests crucially on the fact that most of these countries are still in transition to FDI openness.
Palabra clave: Foreign direct investment, Technology capital, and Development Tema: F23 - Multinational Firms; International Business, F21 - International Investment; Long-term Capital Movements, and O23 - Fiscal and Monetary Policy in Development
Creator: McGrattan, Ellen R. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 670 Abstract:
Previous studies quantifying the effects of increased taxation during the U.S. Great Depression find that its contribution is small, in accounting for both the downturn in the early 1930s and the slow recovery after 1934. This paper shows that this conclusion rests critically on the assumption that the only taxable capital income is business profits. Effects of capital taxation are much larger when taxes on property, capital stock, excess profits, undistributed profits, and dividends are included in the analysis. When fed into a general equilibrium model, the increased taxes imply significant declines in investment and equity values and nontrivial declines in gross domestic product (GDP) and hours of work. Of particular importance during the Great Depression was the dramatic rise in the effective tax rate on corporate dividends.
Tema: E13 - General Aggregative Models: Neoclassical, E32 - Business Fluctuations; Cycles, and H25 - Business Taxes and Subsidies including sales and value-added (VAT)
Creator: Holmes, Thomas J. and Thornton Snider, Julia Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 669 Abstract:
We develop a theory of outsourcing in which there is market power in one factor market (labor) and no market power in a second factor market (capital). There are two intermediate goods: one labor-intensive and the other capital-intensive. We show there is always outsourcing in the market allocation when a friction limiting outsourcing is not too big. The key factor underlying the result is that labor demand is more elastic, the greater the labor share. Integrated plants pay higher wages than the specialist producers of labor-intensive intermediates. We derive conditions under which there are multiple equilibria that vary in the degree of outsourcing. Across these equilibria, wages are lower the greater the degree of outsourcing. Wages fall when outsourcing increases in response to a decline in the outsourcing friction.
Tema: L22 - Firm Organization and Market Structure, J31 - Wage Level and Structure; Wage Differentials, and L23 - Organization of Production
Creator: Holmes, Thomas J. and Lee, Sanghoon Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 668 Abstract:
We estimate the factors determining specialization of crop choice at the level of individual fields, distinguishing between the role of natural advantage (soil characteristics) and economies of density (scale economies achieved when farmers plant neighboring fields with the same crop). Using rich geographic data from North Dakota, including new data on crop choice collected by satellite, we estimate the analog of a social interactions econometric model for the planting decisions on neighboring fields. We find that planting decisions on a field are heavily dependent on the soil characteristics of the neighboring fields. Through this relationship, we back out the structural parameters of economies of density. Setting an Ellison-Glaeser dartboard level of specialization as a benchmark, we find that of the actual level of specialization achieved beyond this benchmark, approximately two-thirds can be attributed to natural advantage and one-third to density economies.
Tema: R12 - Size and Spatial Distributions of Regional Economic Activity, R14 - Land Use Pattern, and Q10 - Agriculture: General
Creator: Troshkin, Maxim Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 667 Abstract:
Technical details and specific data sources are provided for “Facts and Myths about the Financial Crisis of 2008” by V. V. Chari, Lawrence Christiano, and Patrick J. Kehoe.
Creator: Chari, V. V., Christiano, Lawrence J., and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 666 Abstract:
The United States is indisputably undergoing a financial crisis and is perhaps headed for a deep recession. Here we examine three claims about the way the financial crisis is affecting the economy as a whole and argue that all three claims are myths. We also present three underappreciated facts about how the financial system intermediates funds between households and corporate businesses. Conventional analyses of the financial crisis focus on interest rate spreads. We argue that such analyses may lead to mistaken inferences about the real costs of borrowing and argue that, during financial crises, variations in the levels of nominal interest rates might lead to better inferences about variations in the real costs of borrowing. Moreover, we argue that even if current increase in spreads indicate increases in the riskiness of the underlying projects, by itself, this increase does not necessarily indicate the need for massive government intervention. We call for policymakers to articulate the precise nature of the market failure they see, to present hard evidence that differentiates their view of the data from other views which would not require such intervention, and to share with the public the logic and evidence that burnishes the case that the particular intervention they are advocating will fix this market failure.
Creator: Yazici, Hakki Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 665 Abstract:
This paper studies efficient allocation of resources in an economy in which agents are initially heterogeneous with regard to their wealth levels and whether they have ideas or not. An agent with an idea can start a business that generates random returns. Agents have private information about (1) their initial types, (2) how they allocate their resources, and (3) the realized returns. The unobservability of returns creates a novel motive for subsidizing agents who have ideas but lack resources to invest in them. To analyze this motive in isolation, the paper assumes that agents are risk-neutral and abstracts away from equality and insurance considerations. The unobservability of initial types and actions implies that the subsidy that poor agents with ideas receive is limited by incentive compatibility: the society should provide other agents with enough incentives so that they do not claim to be poor and have ideas. The paper then provides an implementation of the constrained-efficient allocation in an incomplete markets setup that is similar to the U.S. Small Business Administration’s Business Loan Program. Finally, the paper extends the model in several dimensions to show that the results are robust to these generalizations of the model.