Pietro F. Peretto
Department of Economics
Duke University
Room 241, Department of Economics
Duke University, Durham, NC 27708 (USA)
Phone: (919) 660-1807
Fax: (919) 684-8974
Email: peretto@econ.duke.edu

Office Hours: by appointment


Growth, Macroeconomics, Industrial Organization, International Economics

All Publications

See here or Curriculum Vitae

Current Research

R&D Scale, Markups, and Productivity Growth (with Domenico Ferraro and Soroush Ghazi), February 2024.

Total factor productivity (TFP) growth rates display a hump-shaped pattern from the mid-1970s onward, peaking in the early 2000s. R\&D as a share of firms' sales rises throughout the same period. Motivated by these facts, we develop an endogenous growth model in which large dominant firms face a competitive fringe and charge variable markups. We evaluate the model's ability to match the observations and use it to simulate counterfactual scenarios under alternative configurations of innovation technologies. The model reconciles observed trends in productivity growth and R\&D by steadily increasing overhead labor costs of R\&D labs. The model also generates increasing profits-to-sales ratios consistent with firm-level data from Compustat.

Evolution from Political Fragmentation to a Unified Empire in a Malthusian Economy (with Angus Chu), August 2023, R&R at Journal of Economic Behavior and Organization.

What are the origins of political fragmentation in Europe and political unification in China? This study develops a Malthusian growth model with multiple states to explore interstate competition and the endogenous evolution of human society from political fragmentation to a unified empire. Our model features an agricultural society with citizens and rulers in a Malthusian environment in which the expansion of one state may come at the expense of another state, depending on the elasticity of the land ratio with respect to the ratio of population between states. If this elasticity is less than unity, then multiple states coexist (i.e., political fragmentation) in the long run. However, if this elasticity is equal to unity, then only one state (i.e., political unification) will survive in the long run. Which state becomes the unified empire depends on the state's military power, agricultural productivity, and its rulers' preference for rent-seeking Leviathan taxation. We also discuss the historical relevance of these theoretical predictions.

Public R&D, Private R&D and Growth: A Schumpeterian Approach (with C-Y Huang and C-C Lai), revised August 2023.

This paper introduces public R&D in a tractable Schumpeterian model to study analytically the dynamic effects of changes in public R&D on private R&D, market structure, growth and welfare. While public and private R&D can move in opposite directions in the short run, they move in the same direction in the long run. The tension between the personnel-interaction and knowledge-base effects on one side, and the crowding-out effect on the other, drive these dynamics. The three effects jointly determine firm-level private R&D behavior and thus economic growth in the short run. However, net entry-exit sterilizes the crowding-out effect in the long run, leaving only the first two effects. This difference between short- and long-run behavior rationalizes some of the empirical puzzles documented in the literature. To evaluate quantitatively these analytical insights, we calibrate the model to the USA and feed to it a halving of public R&D that mimics the massive reduction that took place from 1964 to 2021. The economy experiences a long transition characterized by falling productivity of labor in private R&D driven by the falling ratio of public to private knowledge. In the new steady state the growth rate of income per capita falls from 2% to 1.44%. Accounting for the whole transition, welfare falls by about 14%.

Additional files
: (a) Technical Appendix.

Business Taxes, Management Delegation, and Growth (with Maurizio Iacopetta), revised August 2023, R&R at European Economic Review.

We investigate the interplay between agency issues and business taxation within a model showcasing an endogenous market structure. Consistent with cross-country evidence, our analysis yields equilibria that vary in terms of shareholders' reliance on professional managers. We calibrate the model to the US economy. In the short run, a reduction in profit tax fosters growth to a greater extent in an economy with management delegation. However, in the long run, such a tax cut hampers growth. Conversely, an investor protection reform boosts growth both in the short and long terms. We also study the welfare effects of these reforms.

Previous title: Business Tax Reform, Management Delegation and Growth.

Export-led Takeoff in a Schumpeterian Economy (with Angus Chu and Rongxin Xu), Journal of International Economics (2023), 145: 103798.

This 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.

The Rise and Evolution of the Innovative Firm: A Tale of Technology, Market Structure and Managerial Incentives (with Domenico Ferraro and Maurizio Iacopetta), revised September 2022, R&R at Journal of Political Economy Macroeconomics.

We develop a dynamic general equilibrium model of the transition from an economy with small owner-operated businesses to an economy where part of the control over large-scale organizations is delegated to managers. We model managerial delegation as a principal-agent problem: the owner must offer an incentive contract that makes managers exert effort. The choice of whether and when to delegate managerial tasks, and how many managers to employ is dictated by which organizational form yields the higher rate of return to innovative investments. Owners trade-off the benefit from improved efficiency with the cost of forgoing a share of the gross cash flows as managerial compensation. In equilibrium, the owner-managed organization prevails early on when market size is small; delegation becomes profitable only when market size is sufficiently large to guarantee the viability of the incentive contract. Upon delegation, the economy experiences a productivity growth acceleration fueled by faster innovation. However, the emergence of the managerial class is not hard-wired into the theory: equilibria where firms remain small and owner-managed are possible.

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 four decades.

Market Size, Innovation and the Economic Effects of an Epidemic (with Domenico Ferraro), revised April 2023. R&R at Journal of Economic Growth.

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 accounting for transition dynamics.

Innovation and Inequality from Stagnation to Growth (with Angus Chu), European Economic Review (2023), 160: 104615. Innovation and inequality from stagnation to growth

This study explores the evolution of income inequality in an economy featuring an endogenous transition from stagnation to growth. We incorporate heterogeneous households into a Schumpeterian model of endogenous takeoff. In the pre-industrial era, the economy is in stagnation, and income inequality is determined by an unequal distribution of land ownership and remains stationary. When takeoff occurs, the economy experiences innovation and economic growth. In this industrial era, income inequality gradually rises until the economy reaches the balanced growth path. Finally, we calibrate the model for a quantitative analysis and compare the simulation results to historical data in the UK.

Dynamic Effects of Patent Policy on Innovation and Inequality in a Schumpeterian Economy (with Angus Chu, Yuichi Furukawa, Sushanta Mallick and Xilin Wang), Economic Theory (2021), 71: 1429-1465.

This study explores the dynamic effects of patent policy on innovation and income inequality in a Schumpeterian growth model with endogenous market structure and heterogeneous households. We find that strengthening patent protection has a positive effect on economic growth and a positive or an inverted-U effect on income inequality when the number of differentiated products is fixed in the short run. However, when the number of products adjusts endogenously, the effects of patent protection on growth and inequality become negative in the long run. We also calibrate the model to US data to perform a quantitative analysis and find that the long-run negative effect of patent policy on inequality is much larger than its short-run positive effect. This result is consistent with our empirical finding from a panel vector autoregression.

Labor Taxes, Market Size and Productivity Growth (with Domenico Ferraro and Soroush Ghazi), Economic Journal (2023), 133: 2210-2250. Published online as Featured Article: https://doi.org/10.1093/ej/uead028.

We formulate and estimate a general equilibrium model of innovation-led growth and use it to evaluate the quantitative implications of individual income tax reforms for innovation and aggregate productivity growth. In the model, innovation comes from entrants creating new products and incumbents improving own existing products. We estimate the model parameters by matching key moments of U.S. data. The model generates an aggregate labor supply elasticity and a per capita GDP growth response to marginal tax rate changes that are consistent with available empirical estimates. We find that the model accounts reasonably well for the observed movements in TFP, labor productivity, hours worked and number of firms per capita during the "Reagan tax cuts'' of the eighties. The model predicts that a temporary, deficit-financed, 3 percentage points cut in the average marginal individual income tax rate, set to expire in 2025, produces a temporary TFP growth acceleration leading to a 6 percent increase in real per capita GDP by year 2040.

Corporate Governance and Industrialization (with Maurizio Iacopetta), European Economic Review (2021), 135: 103718

Corporate governance distortions delay or even halt a country's transformation into a modern innovation economy. We investigate the mechanism through a growth model that allows for agency issues within firms. Governance distortions raise the cost of investment and depress the incentives to set up new firms. Modest differences in governance account for large gaps in income: A 32 percent investment cost differential explains the secular decline of Latin America income relative to that of the USA, and implies an industrialization delay of a third of a century. We obtain similar results for a large number of countries and macro-regions.

Innovation-led Growth in a Time of Debt  (with Domenico Ferraro), European Economic Review (2020), 121: 103350.

We study the effects of large reductions in government budget deficits (labeled "fiscal consolidations'') on firms' entry, innovative investments, productivity and per capita output growth in a model of endogenous technological change. Due to the absence of lump-sum taxes, temporary budget deficits set government debt-output ratios on unsustainable paths. An equilibrium then requires the specification of a date at which the debt-output ratio is stabilized at a constant finite value. We discipline parameters using post-war observations for the U.S. economy. We find that fiscal consolidations produce persistent growth slowdowns, permanently lowering the path of per capita output relative to a benchmark economy in which the fiscal consolidation is achieved with lump-sum taxes. These output losses are sizable. In this sense, government debt is a burden on the economy. Tax-based consolidations produce output losses that are twice as large as those from spending-based consolidations.

Note: this is the published version of the paper previously posted under the title Day of Reckoning: Output Losses from Fiscal Stabilizations

Growth with Deadly Spillovers (with Simone Valente), revised July 2023, R&R at International Economic Review.

Empirical studies show that pollution is one of the world's most significant causes of premature death. However, despite its importance macroeconomics still largely neglects this negative externality. To fill the gap, we build a model where productivity growth, emissions, mortality and fertility are all endogenous. Primary production exploits natural resources and generates emissions that increase total deaths. Unlike conventional pollution externalities, deadly spillovers affect the path of economic activity and the associated level of welfare through multiple channels - consumption and fertility choices, labor supply, incentives to innovate. They can also undermine development even for damage elasticities below unity. The reason is that the response of the mortality rate to population change is not only state-dependent but also generates mortality traps - equilibrium paths leading to population implosion. Differently from poverty traps triggered by low income per worker, mortality traps threaten resource-rich economies with low population. Subsidies to primary production reduce long-run population capacity and expand the mortality trap. Discoveries of natural resource endowments bring the economy closer to population implosion and may as well expand the trap.

More Apples vs. Better Apples: Distribution and Innovation-Driven Growth  (with Rob Kane), Journal of Economic Theory (2020), 185: 104964.

We model distribution, the delivery of goods to customers, as an activity governed by its own technology and undertaken by firms subsequently to production operations. We then use the model to investigate how distribution shapes innovation-driven economic growth. We contrast two canonical specifications of distribution costs, iceberg vs. per-unit, and characterize their implications for innovation. The per-unit cost implies that factory-specific productivity improvements cannot sustain steady-state growth. The reason is the classic Alchian-Allen insight: as the unit cost of production falls relative to the cost of distribution, it becomes harder to increase sales through cost reduction. Quality improvement, on the other hand, raises the services that customers obtain from each physical unit of the good so that firms can increase the volume of services delivered without increasing the volume of shipments. This mechanism explains why as the economy develops it gradually engages in more quality improvement relative to cost reduction. Unless technological advancements allow the distribution cost to fall to zero, quantity growth must cease and long-run growth must be driven by quality improvement. More generally, the ratio of distribution to manufacturing unit costs must be constant in the steady state. The iceberg cost delivers this property by assumption. The per-unit distribution cost, instead, yields an endogenous structure of the costs of serving the market.

Through Scarcity to Prosperity: Toward A Theory of Sustainable Growth, Journal of Monetary Economics (2021), 117: 243-257.

This paper integrates fertility choice and exhaustible resource dynamics in a tractable model of endogenous technological change. The analysis shows that, under the right conditions, the interdependence of population, resources and technology produces a transition from unsustainable resource-based growth to sustainable knowledge-based growth that consists of three phases: (1) an initial phase where agents build up the economy by exploiting exhaustible natural resources to support population growth; (2) an intermediate phase where agents turn on the Schumpeterian engine of endogenous innovation in response to population-led market expansion; (3) a terminal phase where growth becomes fully driven by knowledge accumulation and no longer requires growth of physical inputs. The last phase is crucial: not only economic growth no longer requires growth of physical inputs, but technological change also compensates for the exhaustion of the natural resource stock.

Additional files
: (a) Technical Appendix.

Wealth Creation, Wealth Dilution and Population Dynamics (with Christa Brunnschweiler and Simone Valente), Journal of Monetary Economics (2021), 117: 441-459.

Wealth creation driven by R&D investment and wealth dilution caused by disconnected generations interact with households' fertility decisions, delivering a theory of sustained endogenous output growth with a constant endogenous population level in the long run. Unlike traditional theories, our model fully abstracts from Malthusian mechanisms and provides a demography-based view of the long run where the ratios of key macroeconomic variables -- consumption, labor incomes and financial assets -- are determined by demography and preferences, not by technology. Calibrating the model parameters on OECD data, we show that negative demographic shocks induced by barriers to immigration or increased reproduction costs may raise growth in the very long run, but reduce the welfare of a long sequence of generations by causing permanent reductions in the mass of firms and in labor income shares, as well as prolonged stagnation during the transition.

Implications of Tax Policy for Innovation and Aggregate Productivity Growth (with Domenico Ferraro and Soroush Ghazi), European Economic Review (2020), 130: 103590 1-s2.0-S0014292120302208-main.pdf

The quantitative implications of income taxation for innovation and aggregate productivity growth are evaluated in the context of a Schumpeterian model of innovation-led growth. In the model, innovation comes from entrant firms creating new products and from incumbent firms improving own existing products. The model embodies key features of the U.S. government sector: (i) an individual income (labor income, dividends, and capital gains) and (ii) corporate tax; (iii) a consumption tax; and (iv) government purchases. The model is further restricted to fit observations for the post-war U.S. economy. The results suggest that endogenous movements in TFP constitute a quantitatively important channel for the transmission of tax policy to real GDP growth. Endogenous market structure plays a key role in the propagation of tax shocks.

The Cumulative Cost of Regulations (with Bentley Coffey and Patrick A. McLaughlin), Review of Economic Dynamics (2020), 38, 1-21.

We estimate the effects of federal regulation on value added to GDP for a panel of 22 industries in the United States over a period of 35 years (1977-2012). The structure of our linear specification is explicitly derived from the closed-form solutions of a multisector Schumpeterian model of endogenous growth. We allow regulation to enter the specification in a flexible manner. Our estimates of the model's parameters are then identified from covariation in some standard sector-specific data joined with RegData 2.2, which measures the incidence of regulations on industries based on a text analysis of federal regulatory code. With the model's parameters fitted to real data, we confidently conduct counterfactual experiments on alternative regulatory environments. Our results show that economic growth has been dampened by approximately 0.8 percent per annum since 1980. Had regulation been held constant at levels observed in 1980, our model predicts that the economy would have been nearly 25 percent larger by 2012 (i.e., regulatory growth since 1980 cost GDP $4 trillion in 2012, or about $13,000 per capita).

Robust Endogenous Growth, European Economic Review (2018), 108, 49-77.

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.

Resources, Innovation and Growth in the Global Economy (with Simone Valente), Journal of Monetary Economics (2011), 58, 387-399.

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.

Credit Quantity And Credit Quality: Bank Competition And Capital Accumulation (with Nicola Cetorelli), Journal of Economic Theory (2012), 147(3), 967-998.

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 Są 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,

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 USand EU15 economies over the last 40-50 years. It also features feedback mechanisms linking the two markets that amplify the adverse effects on output of labor and product market frictions. These multiplier effects have interesting policy implications.

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 USfor the period 1964-2001 provide strong support for these claims. While employment and the total number of R&D workers increase with no apparent matching change in the long-run trend of productivity growth, employment and R&D employment per establishment exhibit no long-run trend. We also document that the number of establishments, employment and population exhibit a positive trend, while the ratio employment/establishments does not. Finally, we provide results of time series tests consistent with the predictions of these models.

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)