Department of Economics
Room 241, Department of Economics
Duke University, Durham, NC 27708 (USA)
Phone: (919) 660-1807
Fax: (919) 684-8974
Office Hours: by appointment
Growth, Macroeconomics, Industrial Organization, International Economics
See here or Curriculum Vitae
Business Tax Reforms, Management Delegation, and Growth (with Maurizio Iacopetta), December 2022
We study the growth effects of business tax cuts in two economies
that differ by corporate governance: in one, firm founders
delegate production and/or in-house R&D to hired managers; in
the other, they do not. In line with empirical evidence,
delegation occurs if the rule of law is sufficiently strong.
Despite the agency frictions that it entails, delegation improves
the firm's use of resources in production and/or innovation. The
interaction between taxation and governance affects aggregate
productivity growth, which is driven by entry of new firms and by
the accumulation of intangibles by incumbent firms. Our analysis
suggests that management delegation amplifies the macroeconomic
responses to changes in business income taxation. Quantitative
experiments show that in the near and medium term, in response to
a 1 percentage point reduction of the profit tax rate, per capita
income growth rises by around 0.02 percentage points more in the
delegation than in the no-delegation economy.
Export-led Takeoff in a Schumpeterian
Economy (with Angus Chu and Rongxin Xu), July
study develops an open-economy Schumpeterian growth model
with endogenous takeoff to explore the effects of exports
on the transition of an economy from stagnation to
innovation-driven growth. We find that a higher export
demand raises the level of employment, which causes a
larger market size and an earlier takeoff along with a
higher transitional growth rate of domestic output per
capita but has no effect on long-run economic growth.
These theoretical results are consistent with empirical
evidence that we document using cross-country panel data
in which the positive effect of exports on economic growth
becomes smaller, as countries become more developed, and
eventually disappears. We also calibrate the model to data
in China and find that its export share increasing from
4.6% in 1978 to 36% in 2006 causes a rapid growth
acceleration, but the fall in exports after 2007 causes a
growth deceleration that continues until recent times.
Agricultural Revolution and
Industrialization (with Angus Chu
and Xilin Wang), Journal of Development Economics (2022), 158: 102887.
This study explores how agricultural technology affects the
endogenous takeoff of an economy in the Schumpeterian growth
model. Due to the subsistence requirement for agricultural
consumption, an improvement in agricultural technology reallocates
labor from agriculture to the industrial sector. Therefore,
agricultural improvement expands the firm size in the industrial
sector, which determines innovation and triggers an endogenous
transition from stagnation to growth. Calibrating the model to
data, we find that without the reallocation of labor from
agriculture to the industrial sector in the early 19th century,
the takeoff of the US economy would have been delayed by about
Market Size, Innovation and the
Economic Effects of an Epidemic (with
Domenico Ferraro), revised May 2022.
We develop a framework for the analysis of the economic
effects of an epidemic that incorporates firm-specific
innovation and endogenous entry. Transition dynamics is
characterized by two differential equations describing the
evolution of the mass of susceptible in the population and
the ratio of the population to the mass of firms. An
epidemic propagates through the economy via changes in
market size that reduce incentives to enter the market and
to undertake innovative activity. We evaluate
state-dependent interventions involving policy rules based
on tracking susceptible or infected. Simple policy rules are
announced at the time of the outbreak and anchors private
sector’s expectations about the time path of the
intervention, including the end date. Welfare gains/losses
relative to the do-nothing scenario are computed ac-
counting for transition dynamics.
Note:this is the published version of the paper previously posted under the title Day of Reckoning: Output Losses from Fiscal Stabilizations
This paper studies a generalization of the Schumpeterian models
with endogenous market structure that allows the overall
production structure to be more than linear in the growth-driving
factor and yet generates endogenous growth, defined as
steady-state, constant, exponential growth of income per capita.
This version of modern growth theory, therefore, is robust in the
sense that its key result obtains for a thick set of parameter
values instead of, as often claimed, for a set of measure zero.
The paper, moreover, pays close attention to transitional
dynamics, showing not only the existence but also the global
stability of the endogenous-growth steady state.
Additional files: (a) Technical Appendix; (b) A Note on the Second Linearity Critique.
Commodity Prices and Growth (with Domenico Ferraro), Economic Journal (2018), 128, 3242-3265.
In this paper we propose an endogenous
growth model of commodity-rich economies in which: (i) long-run
(steady-state) growth is endogenous and yet independent of
commodity prices; (ii) commodity prices affect short-run growth
through transitional dynamics; and (iii) the status of net
commodity importer/exporter is endogenous. We argue that these
predictions are consistent with historical evidence from the 19th
to the 21st century.
Financial Markets, Industry Dynamics, and Growth (with Maurizio Iacopetta and Raoul Minetti), Economic Journal (2019), 129, 2192-2215.
We study the impact of corporate governance frictions in an economy where growth is driven both by the foundation of new firms and by the in-house investment of incumbent firms. Firms' managers engage in tunneling and empire building activities. Active shareholders monitor managers, but can shirk on their monitoring, to the detriment of minority (passive) shareholders. The analysis reveals that these conflicts among firms' stakeholders inhibit the entry of new firms, thereby increasing market concentration. Despite depressing investment returns in the short run, the frictions can however lead incumbents to invest more aggressively in the long run to exploit the concentrated market structure. By means of quantitative analysis, we characterize conditions under which corporate governance reforms boost or reduce welfare.
Additional files: (a) Technical Appendix.
From Smith to Schumpeter: A Theory of Take-off and Convergence to Sustained Growth, European Economic Review (2015), 78, 1-26.
This paper proposes a theory of the emergence of modern Schumpeterian growth that focuses on the within-industry forces that regulate the response of firms and entrepreneurs to Smithian market expansion and thus identifies an amplification mechanism that the literature has neglected. Because it solves the model in closed-form, the paper provides analytical insight on the forces that drive the economy's phase transition and the associated qualitative transformation of industrial activity. The resulting S-shaped path of GDP per capita replicates the key feature of the data: an accelerating phase followed by a deceleration with convergence to a stationary growth rate. The model also yields predictions for grand ratios like consumption/GDP, profits/GDP, and the distribution of income across factors of production.
Endogenous Growth and Property Rights Over Renewable Resources (with Nujin Suphaphiphat and Simone Valente), European Economic Review (2015), 76, 125-151.
We study how different regimes of access rights to renewable natural resources -- namely, open access versus full property rights -- affect sustainability, growth and welfare in the context of modern endogenous growth theory. Resource exhaustion may occur under both regimes but is more likely to arise under open access. Moreover, under full property rights, positive resource rents increase expenditures on manufacturing goods and temporarily accelerate productivity growth, but also yield a higher resource price at least in the short-to-medium run. We characterize analytically and quantitatively the model's dynamics to assess the welfare implications of differences in property rights enforcement.
Growth on a Finite Planet: Resources, Technology and Population in the Long Run (with Simone Valente), Journal of Economic Growth (2015), 20, 305-331.
We study the interactions between technological change, resource scarcity and population dynamics in a Schumpeterian model with endogenous fertility. We find a pseudo-Malthusian equilibrium in which population is constant and determined by resource scarcity while income grows exponentially. If labor and resources are substitutes in production, income and fertility dynamics are self-balancing and the pseudo-Malthusian equilibrium is the global attractor of the system. If labor and resources are complements, income and fertility dynamics are self-reinforcing and drive the economy towards either demographic explosion or collapse. Introducing a minimum resource requirement per capita, we obtain constant population even under complementarity.
The relative performance of open economies is analyzed in an endogenous growth model with asymmetric trade. A resource-rich country trades resource-based intermediates for final goods produced by a resource-poor economy. The effects of an increase in the resource endowment depend on the elasticity of substitution between resources and labor in intermediates' production. Under substitution (complementarity), the resource boom generates higher (lower) income, lower (higher) employment in the primary sector and faster (slower) growth in the resource-rich economy. In the resource-poor economy, the shock induces a higher (lower) relative wage and positive (negative) growth effects that are exclusively due to trade.
In this paper we show that bank competition has an intrinsically ambiguous impact on capital accumulation and growth. We further show that banking market structure is also responsible for the emergence of development traps in economies that otherwise would be characterized by unique steady state equilibria. These predictions explain the conflicting evidence gathered from recent empirical studies on the role of bank competition for the real economy. We obtain these results developing a dynamic, general equilibrium model of capital accumulation where banks operate in a Cournot oligopoly. More banks lead to a higher quantity of credit available to entrepreneurs, but also to diminished incentives to screen loan applicants, thus to poorer capital allocation. We also show that conditioning on economic parameters describing the quality of the entrepreneurial population resolves the theoretical ambiguity. In economies where prospective entrepreneurs are on average of low quality, hence where screening is especially beneficial, less competition leads to higher capital accumulation. The opposite is true where entrepreneurs are innately of higher quality.
Sustaining The Goose That Lays The Golden Egg: A Continuous Treatment Of Technological Transfer (with Nelson Sŕ and Michelle Connolly), Scottish Journal of Political Economy (2009), 56, 492-507.
This paper proposes a simple model of the trade-offs perceived by innovating firms when investing in countries with limited intellectual property rights (IPR). The model allows for a continuous treatment of technology transfer and production cost gains occurring through FDI. While it does not consider possible changes in rates of innovation caused by changes in intellectual property rights in developing countries, it allows one to uncover a potentially non-monotonic relationship between welfare and IPR in the recipient country.
Resource abundance, growth and welfare: A Schumpeterian perspective, Journal of Development Economics (2012), 97, 142-155.
This paper takes a new look at the long-run implications of
resource abundance. It develops a Schumpeterian model of
endogenous growth that incorporates an upstream resource-intensive
sector and yields an analytical solution for the transition path.
It then derives conditions under which, as the economy's endowment
of a natural resource rises, (i) growth accelerates and welfare
rises, (ii) growth decelerates but welfare rises nevertheless, and
(iii) growth decelerates and welfare falls. Which of these
scenarios prevails depends on the response of the natural resource
price to an increase in the resource endowment. The price response
determines the change in income earned by the owners of the
resource (the households) and thereby the change in their
expenditure on manufacturing goods. Since manufacturing is the
economy's innovative sector, this income-to-expenditure effect
links resource abundance to the size of the market for
manufacturing goods and drives how resource abundance affects
incentives to undertake innovative activity.
Note:this is the published version of the paper previously posted under the title Is the "Curse" of Natural Resources Really a Curse?
Factor-Eliminating Technological Change (with John Seater), Journal of Monetary Economics (2013), 60, 459-473.
Perpetual growth requires offsetting diminishing returns to
reproducible factors of production. In this article we present a
theory of factor elimination. For simplicity and clarity, there is
no augmentation of non-reproducible factors, thus excluding the
standard engine of growth. By spending resources on R&D,
agents learn to change the exponents of a Cobb-Douglas production
function. We obtain the economy's balanced growth path and
complete transition dynamics. The theory provides a mechanism for
the transition from an initial technology incapable of supporting
perpetual growth to one with constant returns to reproducible
factors that supports it.
Energy Taxes and Endogenous Technological Change, Journal of Environmental Economics and Management (2009), 57, 269-283.
This paper studies the effects of a tax on energy use in a growth
model where market structure is endogenous and jointly determined
with the rate of technological change. Because this economy does
not exhibit the scale effect (a positive relation between TFP
growth and aggregate R&D), the tax has no effect on the
steady-state growth rate. It has, however, important transitional
effects that give rise to surprising results. Specifically, under
the plausible assumption that energy demand is inelastic, there
exists a hump-shaped relation between the energy tax and welfare.
This shape stems from the fact that the reallocation of resources
from energy production to manufacturing triggers a temporary
acceleration of TFP growth that generates a ✓-shaped time profile
of consumption. If endogenous technological change raises
consumption sufficiently fast and by a sufficient amount in the
long run, the tax raises welfare despite the fact that -- in line
with standard intuition -- it lowers consumption in the short run.
The Growth and Welfare Effects of Deficit-Financed Dividend Tax Cuts, Journal of Money, Credit and Banking (2011), 43, 835-869.
I develop a tractable growth model that allows me to study
analytically transition dynamics and welfare in response to a
deficit-financed cut of the tax rate on distributed dividends. I
then carry out a quantitative assessment of the Job Growth and
Taxpayer Relief Reconciliation Act (JGTRRA) of 2003. I find that
the Act produces lower steady-state growth despite the fact that
the economy's saving and employment ratios rise. Most importantly,
it produces a welfare loss of 19.34% of annual consumption per
capita --- a substantial effect driven by the fact that the
steady-state growth rate falls from 2% to 1.08%.
Note:this is the published version of the paper previosuly posted under the title A Schumpeterian Analysis of Deficit-Financed Dividend Tax Cuts
The Employment (and Output) of Nations: Theory and Policy Implications, Economic Modeling (2021), 103: 105580.
I study the effects of product and labor market frictions in a
dynamic general equilibrium model with a three-state
representation of the labor market. Firms bargain with unions over
wages and employment levels. This generates unemployment.
Households take the associated unemployment risk as given in
making participation and consumption-saving decisions.
Unemployment harms output because it inserts a wedge between labor
supply (participation) and employment. New firms make entry
decisions based on expected future profitability as determined by
macroeconomic conditions. The model produces dynamics consistent
with the long-run trends exhibited by the
The Manhattan Metaphor (with Michelle Connolly), Journal of Economic Growth (2007), 12, 329-350.
Fixed operating costs draw a sharp distinction between endogenous
growth based on horizontal and vertical innovation: a larger
number of product lines puts pressure on an economy's resources;
greater productivity of existing product lines does not.
Consequently, the only plausible engine of growth is vertical
innovation whereby progress along the quality or cost ladder does
not require the replication of fixed costs. Is, then, product
variety expansion irrelevant? No. The two dimensions of technology
are complementary in that using one and the other produces a more
comprehensive theory of economic growth. The vertical dimension
allows growth unconstrained by endowments, the horizontal provides
the mechanism that translates changes in aggregate variables into
changes in product-level variables, which ultimately drive
incentives to push the technological frontier in the vertical
dimension. We show that the potential for exponential growth due
to an externality that makes entry costs fall linearly with the
number of products, combined with the limited carrying capacity of
the system due to fixed operating costs, yields logistic dynamics
for the number of products. This desirable property allows us to
provide a closed-form solution for the model's transition path and
thereby derive analytically the welfare effects of changes in
parameters and policy variables. Our Manhattan Metaphor
illustrates conceptually why we obtain this mathematical
representation when we simply add fixed operating costs to the
standard modeling of variety expansion.
Corporate Taxes, Growth and Welfare in a Schumpeterian Economy, Journal of Economic Theory (2007), 137, 353-382.
I take a new look at the long-run implications of taxation
through the lens of modern Schumpeterian growth theory. I focus on
the latest vintage of models that sterilize the scale effect
through a process of product proliferation that fragments the
aggregate market into submarkets whose size does not increase with
the size of the workforce. I show that the following interventions
raise welfare: (a) Granting full expensibility of R&D to
incorporated firms; (b) Eliminating the corporate income tax
and/or the capital gains tax; (c) Reducing taxes on labor and/or
consumption. What makes these results remarkable is that in all
three cases the endogenous increase in the tax on dividends
necessary to balance the budget has a positive effect on growth. A
general implication of my analysis is that corporate taxation
plays a special role in Schumpeterian economies and provides novel
insights on how to design welfare-enhancing tax reforms.
Effluent Taxes, Market Structure and the Rate and Direction of Endogenous Technological Change, Environmental and Resource Economics (2008), 39, 113-138.
This paper studies the effects of effluent taxes on firms' allocation of resources to cost-reducing and emission-reducing R&D, and on entrepreneurs' decisions to develop new goods and enter the market. A tax set at an exogenous rate that does not depend on the state of technology reduces growth, the level of consumption of each good, and raises the number of firms. The induced increase in the variety of goods is a benefit not considered in previous analyses. In terms of environmental benefits, the tax induces a positive rate of pollution abatement that offsets the "dirty" side of economic growth. A tax set at an endogenous rate that holds constant the tax burden per unit of output, in contrast, has ambiguous effects on growth, the scale of activity of each firm and the number of firms. Besides being novel, the potential positive growth effect of this type of effluent tax is precisely what makes this instrument effective for welfare-maximizing purposes. The socially optimal policy, in fact, requires the tax burden per unit of output to equal the marginal rate of substitution between the growth rate of consumption and abatement. Moreover, a tax/subsidy on entry is needed, depending on whether the contribution of product variety to pollution dominates consumers' love of variety.
Schumpeterian Growth with Productive Public Spending and Distortionary Taxation, Review of Development Economics (2007), 11, 699-722.
The latest version of Schumpeterian growth theory eliminates the scale effect by positing a process of development of new product lines that fragments the aggregate market in submarkets whose size does not increase with population. A key feature of this process is the sterilization of the effect of the size of the aggregate market on firms' incentives to invest in the growth of a given product line. In this paper I apply this insight to shed new light on the workings of fiscal policy. I analyze the role of distortionary taxes on consumption, household labor and assets income, corporate income, and public spending. The framework allows me to show which of these fiscal variables have permanent (steady-state) growth effects, and which ones have only transitory effects. It also allows me to solve the transitional dynamics analytically, and thus to analyze in detail the welfare effects of tax rates and public spending, and investigate the effects of revenue-neutral changes in tax structure. Pair wise comparisons reveal that replacing taxes that distort labor supply with taxes that distort saving/investment choices raises welfare. I discuss the intuition behind this surprising finding.
Scale Effects in Endogenous Growth Theory: An Error of Aggregation, Not Specification (with Chris Laincz), Journal of Economic Growth (2006), 11, 263-288.
Modern Schumpeterian growth theory focuses on the product line as
the main locus of innovation and exploits endogenous product
proliferation to sterilize the scale effect. The empirical core of
the theory consists of two claims: (i) growth depends on average
employment (i.e., employment per product line); (ii) average
employment is scale-invariant. We show that data on employment,
R&D personnel, and the number of establishments in the
Market Power, Unemployment, and Growth, in Frontiers of Economic Growth and Development, edited by Kwan Choi and Olivier de La Grandville, forthcoming in the series Frontiers of Economics and Globalization (Emerald).
I present a model where firms and workers set wages above the market-clearing level. Unemployment is thus generated by their exercise of market power. Because both the labor and product markets are imperfectly competitive, market power in the labor market interacts with market power in the product market. This interaction sheds new light on the effects of policy interventions on unemployment and growth. For example, labor market reforms that reduce labor costs reduce unemployment and boost growth because they expand the scale of the economy and generate more competition in the product market.
Econ 882M-01&02: Topics Macro/International Finance: Economic Growth (PhD)
Econ 602-01: Macroeconomic Theory (Master)
Econ 452/652: Economic Growth (Undergraduate/Master)