Contributions published at Macroeconomics and Political Economy (Fabrizio Zilibotti)

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We study a dynamic general equilibrium model where innovation takes the form of the introduction of new goods whose production requires skilled workers. Innovation is followed by a costly process of standardization, whereby these new goods are adapted to be produced using unskilled labor. Our framework highlights a number of novel results. First, standardization is both an engine of growth and a potential barrier to it. As a result, growth is an inverse U-shaped function ofthe standardization rate (and of competition). Second, we characterize the growth and welfare maximizing speed of standardization. We show how optimal protection of intellectual property rights affecting the cost of standardization vary with the skill-endowment, the elasticity of substitution between goods and other parameters. Third, we show that, depending on how competition between innovating and standardizing firms is modelled and on parameter values, a new type of multiplicity of equilibria may arise. Finally, we study the implications of our model forthe skill-premium and we illustrate novel reasons for linking North-South trade to intellectual property rights protection.

We develop a tractable dynamicmodel of productivity growth and technology spillovers that is consistent with the emergence of real world empirical productivity distributions. Firms can improve productivity by engaging in in-house R&D, or alternatively, by trying to imitate other firms’ technologies, subject to the limits of their absorptive capacities. The outcome of both strategies is stochastic. The choice between in-house R&Dand imitation is endogenous, and based on firms’ profit maximization motive. Firms closer to the technological frontier face fewer imitation opportunities, and choose in-house R&D, while firms farther from the frontier try to imitate more productive technologies. The equilibriumchoice leads to a balanced-growth equilibriumfeaturing persistent productivity differences even when starting from ex-ante identical firms. The long-run productivity distribution can be described as a traveling wave with tails following a Pareto as can be observed in the empirical data.

We assess the role of financial linkages in the transmission of sovereign risk in the Euro Crisis. Building on the narrative approach by Romer and Romer (1989), we use financial news to identify structural shocks in a vector autoregressive model of daily sovereign CDS premia for eleven European countries. To estimate how these shocks transmit across borders, we use data on cross-country bank exposures to sovereign debt. Our results indicate that exposure to Greek sovereign debt and the debt of Greek banks constitute important transmission channels. All else being equal, the transmission rate to the country with the greatest exposure to Greece (1.22 percent of GDP) has been roughly 46 percent higher than the rate to the country with the least exposure (0.08 percent of GDP).

We build a theoretical framework that allows for endogenous conflict behaviour (i.e., fighting efforts) and for endogenous natural resource exploitation (i.e., speed, ownership, and investments). While depletion is spread in a balanced Hotelling fashion during peace, the presence of conflict creates incentives for rapacious extraction, as this lowers the stakes of future contest. This voracious extraction depresses total oil revenue, especially if world oil demand is relatively elastic and the government’s weapon advantage is weak. Some of these political distortions can be overcome by bribing rebels or by government investment in weapons. The shadow of conflict can also make less efficient nationalized oil extraction more attractive than private extraction, as insecure property rights create a holdup problem for the private firm and lead to a lower license fee. Furthermore, the government fights less intensely than the rebels under private exploitation, which leads to more government turnover. Without credible commitment to future fighting efforts, private oil depletion is only lucrative if the government’s non-oil office rents are large and weaponry powerful, which guarantees the government a stronger grip on office and makes the holdup problem less severe.

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Many terror attacks occur at the beginning of electoral terms. We present a game theoretical model with incomplete information to account for this empirical pattern. Both terrorists and governments can be of weak or strong types. We find that the risk of terror attacks is highest at the beginning of electoral terms, because striking early allows the terrorists to collect valuable information about the government’s type, and also because terrorists know that even initially weak governments sometimes retaliate to show toughness closer to an upcoming election. The model’s predictions are consistent with anecdotal evidence.

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In this paper, we quantitatively analyze to what extent a benevolent government should issue debt in a model where households are subject to idiosyncratic productivity shocks, insurance markets are missing and borrowing is restricted. In this environment, issuing government bonds facilitates saving for self-insurance. Despite this, we find that in a calibrated version of the model that is consistent with the skewed wealth and earnings distribution observable in the U.S., the government should buy private bonds, and not issue public debt in the long run. The reason is that in the U.S., a large fraction of the population has almost no wealth or is even in debt. The wealth-poor, however, do not profit from an increase in the interest rate following an increase in public debt. Instead, they gain from higher wages that result from a reduction in debt. We show that even when the short run costs of higher capital taxation are taken into account, it still pays off to reduce government debt on overall. Moreover, we find that endogenizing household’s borrowing constraints by assuming limited commitment leads to even higher asset levels being optimal in the long run.

We study the effect of civil conflict on social capital, focusing on the experience of Uganda during the last decade. Using individual and county-level data, we document causal effects on trust and ethnic identity of an exogenous outburst of ethnic conflicts in 2002-04. We exploit two waves of survey data from Afrobarometer 2000 and 2008, including information on socioeconomic characteristics at the individual level, and geo-referenced measures of fighting events from ACLED. Our identification strategy exploits variations in the intensity of fighting both in the spatial and cross-ethnic dimensions. We find that more intense fighting decreases generalized trust and increases ethnic identity. The effects are quantitatively large and robust to a number of control variables, alternative measures of violence, and different statistical techniques involving ethnic and county fixed effects and instrumental variables. We also document that the post-war effects of ethnic violence depend on the ethnic fractionalization. Fighting has a negative effect on the economic situation in highly fractionalized counties, but has no effect in less fractionalized counties. Our findings are consistent with the existence of a self-reinforcing process between conflicts and ethnic cleavages.

In recent decades, the US has experienced a widening of the college enrolment gap between rich and poor families. This is commonly interpreted as evidence for a tightening of borrowing constraints. This paper asks whether this is indeed the case. I present an incomplete-markets overlapping-generations model with college enrolment, in which altruistic parents provide transfers to their children. In the model the rise in earnings inequality observed between 1980 and 2000 acts as the driving force for generating the trends in the data. With the help of counterfactual experiments, I find that fraction of constrained households is much higher (24 instead of 8 percent) than indicated by the narrow enrolment gap in 1980. Contrary to what the development of the enrolment gap in the data suggests, the share of constrained households actually fell (to 18 percent) between 1980 and 2000. I show that altruism is important for explaining these findings.

No voters cast their votes based on perfect information, but better educated and richer voters are on average better informed than others. We develop a model where the voting mistakes resulting from low political knowledge reduce the weight of poor voters, and cause parties to choose political platforms that are better aligned with the preferences of rich voters. In US election survey data, we find that income is more important in affecting voting behavior for more informed voters than for less informed voters, as predicted by the model. Further, in a panel of US states we fi*nd that when there is a strong correlation between income and political information, Congress representatives vote more conservatively, which is also in line with our theory.

Sovereign debt crises in emerging markets are usually associated with liquidity and banking crises. The conventional view is that the domestic financial turmoil is the consequence of foreign retaliation, although there is no clear empirical evidence on "classic" default penalties. This paper emphasizes instead a direct link between sovereign defaults and liquidity crises, building on two natural assumptions: (i) government bonds represent a source of liquidity for the domestic private sector; (ii) the government cannot discriminate between domestic and foreign creditors in the event of default. In this context, external debt emerges even in the absence of classic penalties and government default is counter cyclical, triggers a liquidity crunch, and amplifies output volatility. In addition, a financial reform that involves a substitution of government bonds with privately-sourced liquidity instruments could backfire by restricting government's access to foreign credit.

We construct a dynamic theory of civil conflict hinging on inter-ethnic trust and trade. The model economy is inhabitated by two ethnic groups. Inter-ethnic trade requires imperfectly observed bilateral investments and one group has to form beliefs on the average propensity to trade of the other group. Since conflict disrupts trade, the onset of a conflict signals that the aggressor has a low propensity to trade. Agents observe the history of conflicts and update their beliefs over time, transmitting them to the next generation. The theory bears a set of testable predictions. First, war is a stochastic process whose frequency depends on the state of endogenous beliefs. Second, the probability of future conflicts increases after each conflict episode. Third, "accidental" conflicts that do not reflect economic fundamentals can lead to a permanent breakdown of trust, plunging a society into a vicious cycle of recurrent conflicts (a war trap). The incidence of conflict can be reduced by policies abating cultural barriers, fostering inter-ethnic trade and human capital, and shifting beliefs. Coercive peace policies such as peacekeeping forces or externally imposed regime changes have instead no persistent effects.

We construct and estimate a unified model combining three of the main sources of cross-country income disparities: differences in factor endowments, barriers to technology adoption and the inappropriateness of frontier technologies to local conditions. The key components are different types of workers, distortions to capital accumulation, directed technical change, costly adoption and spillovers from the world technology frontier. Despite its parsimonious parametrization, our empirical model provides a good fit of GDP data for up to 86 countries in 1970 and 122 countries in 2000. Removing barriers to technology adoption would increase the output per worker of the average non-OECD country relative to the US from 0.19 to 0.61, while increasing skill premia in all countries. Removing barriers to trade in goods amplifies income disparities, induces skill-biased technology adoption and increases skill premia in the majority of countries. These results are reverted if trade liberalization is coupled with international IPR protection.

This paper constructs a growth model that is consistent with salient features of the recent Chinese growth experience: high output growth, sustained returns on capital investment, extensive reallocation within the manufacturing sector, falling labor share and accumulation of a large foreign surplus. The building blocks of the theory are asymmetric financial imperfections and heterogeneous productivity. Some firms use more productive technologies, but low-productivity firms survive because of better access to credit markets. Due to the financial imperfections, high-productivity firms — which are run by entrepreneurs — must be financed out of internal savings. If these savings are sufficiently large, the high-productivity firms outgrow the low-productivity firms and attract an increasing employment share. The downsizing of the financially integrated firms forces a growing share of domestic savings to be invested in foreign assets, generating a foreign surplus. A calibrated version of the theory can account quantitatively for China’s growth experience during 1992-2007.

My thesis is centered on the macroeconomic causes and consequences of income inequality. The first two essays develop theoretical frameworks to analyze the impact of income inequality on technical change and long-term economic growth. Inspired by Ford’s “Model T”, the first essay studies a model of endogenous growth where firms invest in product as well as process innovations which introduce low-cost, low-quality versions affordable to the middle class. Income inequality shapes product cycles and generates substantially different incentives for product and process innovation. Whereas an egalitarian society creates incentives for process innovations (such as the Model T), an unequal society favors product innovations (new luxuries). While the first essay focuses on process innovations that cut manufacturing costs (at a quality discount), the second studies process innovations that introduce higher quality versions of a variety. The effects of income inequality on product quality and variety are explored in a simple heterogeneous household economy. The income distribution is a key determinant of the quality levels and varieties produced and consumed in an economy when consumers’ willingness to pay for quality and variety differs across levels of income. The final essay is concerned with the causes rather than the consequences of income inequality, studying the effect of financial booms and asset bubbles on wage inequality and sector employment both theoretically and empirically. Meine Doktorarbeit dreht sich um die makroökonomischen Ursachen und Auswirkungen von Einkommensungleichheit. Die ersten zwei Aufsätze entwickeln theoretische Modelle, die den Effekt von Einkommensungleichheit auf den technologischen Wandel und das langfristige Wirtschaftswachstum untersuchen. Inspiriert durch das “Ford Model T“ studiert die erste Arbeit ein endogenes Wachstumsmodell, in dem Firmen in Produkt- sowie Prozessinnovationen investieren, die neue kostengünstige Versionen minderer Qualität einführen, die sich die Mittelklasse leisten kann. Einkommensungleichheit beeinflusst die Produktzyklen und generiert substantiell unterschiedliche Anreize für Produkt- und Prozessinnovationen. Eine gleiche Gesellschaft schafft Anreize für Prozessinnovation (wie das Model T), wohingegen eine ungleiche Gesellschaft Produktinnovationen (Luxusgüter) favorisiert. Während der erste Aufsatz sich auf Prozessinnovationen, die die Produktionskosten senken, konzentriert, untersucht die zweite Arbeit Prozessinnovationen, die höhere Qualitäten von bestehenden Produktvarietäten einführen. Die Einkommensverteilung ist eine wichtige Determinante der produzierten und konsumierten Qualitätslevel und Varietäten in einer Wirtschaft, wenn die Zahlungsbereitschaft für Qualität und Varietät über die Einkommenslevel variiert. Der letzte Aufsatz beschäftigt sich mit den Ursachen statt den Auswirkungen von Einkommensungleichheit und untersucht den Effekt von Finanzbooms und Vermögensblasen auf Lohnungleichheit und sektorale Beschäftigung sowohl theoretisch als auch empirisch.

We construct and estimate a unified model combining three of the main sources of cross-country income disparities: differences in factor endowments, barriers to technology adoption and the inappropriateness of frontier technologies to local conditions. The key components are different types of workers, distortions to capital accumulation, directed technical change, costly adoption and spillovers from the world technology frontier. Despite its parsimonious parametrization, our empirical model provides a good fit of GDP data for up to 86 countries in 1970 and 122 countries in 2000. Removing barriers to technology adoption would increase the output per worker of the average non-OECD country relative to the US from 0.19 to 0.61, while increasing skill premia in all countries. Removing barriers to trade in goods amplifies income disparities, induces skill-biased technology adoption and increases skill premia in the majority of countries. These results are reverted if trade liberalization is coupled with international IPR protection.