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2008 Macro Seminar Papers

 "Informality Trends and Cycles"
Jamele Rigolini (World Bank)

Thursday, January 10, 12:30-2:00, room MC 8-100

This paper studies the trends and cycles of informal employment. It first presents a theoretical model where the size of informal employment is determined by the relative costs and benefits of informality and the distribution of workers’ skills. In the long run, informal employment varies with the trends in these variables, and in the short run it reacts to accommodate transient shocks and to close the gap with respect to its trend. The paper then examines empirically informality’s long- and short-run relationships. For this purpose, it uses country-level data at annual frequency for a sample of developed and developing countries, with the share of self-employment in the labor force as the proxy for informal employment. The paper finds that, in the long run, informality is larger in countries that have lower GDP per capita and impose more costs to formal firms, in the form of more rigid business regulations and less effective police and judicial services. In the short run, informal employment is found to be counter-cyclical for the majority of countries, with the degree of counter-cyclicality being lower in countries with larger informal employment and better police and judicial services. Moreover, informal employment follows a stable, trend-reverting process. These results are robust to changes in the sample and to the influence of outliers, even when only developing countries are considered in the analysis.

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"Votes or Money? Theory and Evidence from the US Congress"
Francisco Trebbi (University of Chicago and NBER)
Jointly written with Matilde Bombardini (University of British Columbia)

Thursday, February 14, 12:30-2:00, room MC 8-100

This paper investigates the relationship between the size of interest groups in terms of voter representation and the interest group’s campaign contributions to politicians. The authors uncover a robust hump-shaped relationship between the voting share of an interest group and its contributions to a legislator. This pattern is rationalized in a simultaneous bilateral bargaining model where the larger size of an interest group affects the amount of surplus to be split with the politician (thereby increasing contributions), but is also correlated with the strength of direct votersupport the group can offer instead of monetary funds (thereby decreasing contributions). The model yields simple structural equations that the authors estimate at the district level employing data on individual and PAC donations and local employment by sector. This procedure yields estimates of electoral uncertainty and politicians effectiveness as perceived by the interest groups. The authors approach also implicitly delivers a novel method for estimating the impact of campaign spending on election outcomes: the authors find that an additional vote costs a politician between 100 and 400 dollars depending on the district.

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"Globalization, Optimal Auctions and Exchange Rate Pass-Through"
Eyal Dvir (Harvard University)

Thursday, February 28, 12:30-2:00, room MC 8-100

The author presents a model of globalized production in which trade is conducted through optimal procurement auctions. In the model, brand owning firms choose suitable producers for their goods out of a worldwide pool of potential suppliers. Under assumptions of asymmetric information and supplier heterogeneity, a discriminatory auction is the profit maximizing mechanism for brand owners. In particular, the author shows that in the optimal auction suppliers who are adversely affected by an exogenous shock receive a boost to their chances of winning, while suppliers who stand to gain from the same shock see their winning chances reduced. Using discrimination in this way, the brand owning firms effectively smooth the effects of shocks across their suppliers, thus limiting the exposure of both their suppliers and their consumers. Therefore when suppliers are subject to volatile costs, discriminatory auctions can serve as automatic stabilizers, not only of import and consumer prices, but also of producer profits. As an implication, the finding that import prices are unresponsive to exchange rate shocks, especially in the U.S., need not indicate excessive vulnerability of exporters' profits to these shocks. In a globalized production environment, stability of import prices and of export profits can go hand in hand.

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" Religious Competition and the Rise and Fall of Muslim Science"
Eric Chaney (Berkeley)

Thursday, March 6, 12:30-2:00, room MC 5-100

Is Islam compatible with development? Disappointing economic growth in predominantly Muslim countries has led to claims that a return to medieval Islamic institutions will stimulate economic growth today as a millennium ago. This paper uses data from the thirteenth century Islamic Levant to examine how one medieval Islamic institution encouraged economic growth by promoting scienti…c and technological innovation. By granting non-Muslims a degree of religious freedom, Muslim law created competition between religions for converts and social standing. Institutionalized tolerance, coupled with initial disadvantages in the number of adherents and sophistication of theological scholarship, encouraged Muslim religious elites to promote the study of logic. The study of logic led, in turn, to the cultivation of the rational sciences. Results suggest that competition and non-religious intellectual enterprise decreased as the societies under Muslim rule became increasingly religiously homogeneous. The results highlight the role of tolerance in Islam's medieval economic development and cast doubt on the idea that Islam is incompatible with technological and economic progress.

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"Debt Contracts with Short-Term Commitment"
Natalia Kovrijnykh (University of Chicago)

Thursday, March 13, 12:30-2:00, room MC7-100

This paper analyzes the role of short-term commitment by the lender in a dynamic relationship where the borrower cannot be legally forced to make repayments. The author shows that short-term commitment can decrease social welfare compared to both the full and no-commitment cases considered by most of the literature. The author shows that the size of investment is positively related to the borrower's income. In addition, both underinvestment and overinvestment can occur in equilibrium. The author also introduce the borrower's outside option and do comparative statics with respect to it. The author shows that the social welfare is non-monotonic in the borrower's outside option. If the borrowers outside option is interpreted as a measure of competitiveness of the credit market, this implies that an increase in the strength of competition has an ambiguous effect on welfare. Furthermore, numerical results suggest that as the outside option of the borrower increases, the renegotiation-proof equilibria converge to the Markov equilibrium, where the agents strategies depend only on the borrower's liquidity. That is, the welfare gain from using complicated history-dependent strategies instead of simple Markov strategies is small when the borrower's outside option is high.

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" Trade and Prices with Heterogeneous Firms"
Robert C. Johnson (Berkeley)

Thursday, Mar. 27, from 12:30-2:00, room MC8-100

This paper estimates a heterogeneous firms trade model using disaggregate data on export values and prices. Prices contain information about differences in product quality across firms and countries that helps identify key mechanisms in the model. Examining within country variation in export prices across destination markets, the author finds that prices behave in a manner inconsistent with the benchmark model that ignores product quality differences across firms. In doing so, the author demonstrate that export prices in most sectors are consistent with a model in which high productivity firms choose to produce high quality goods and charge high prices. Using model estimates, the author also quantify the role of endogenous nontradability in accounting for variation in prices and trade flows, and construct an index of cross-country quality and variety within sectors.

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 "Referendum, Response and Consequences for Sudan: The Game between Juba and Khartoum"
Ibrahim Elbadawi, Gary Milante and Costantino Pischedda (World Bank)

Thursday, April 3, 12:30-2:00, room MC9-100

Game theory models the strategic interaction between Khartoum and Juba leading up to the referendum on partition in 2011. The authors find that excessive militarization and brinksmanship is a rational response for both actors, neither of which can credibly commit to lower levels of military spending under the current status quo. These credibility issues might be resolved by democratization, increased transparency, reduction of information asymmetries and efforts to promote economic and political cooperation and the authors explore these devices in the paper, demonstrating how they can contribute to Pareto preferred outcomes in equilibrium. Finally, the authors estimate the costs of the conflict from data for Sudan and identify the opportunity cost of foregone development implied by continued, excessive and unsustainable militarization.

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 "The Internet, Digital Information and Corruption: Evidence From U.S. States and Across Countries"
Carl-Johan Dalgaard (Univ. of Copenhagen) 
Jointly written with Thomas Barnebeck, Andersen Jeanet Bentzen and Pablo Antonio Selaya (Univ. of Copenhagen)

Thursday, April 10, 12:30-2:00, room MC3-101

The authors hypothesize that the spread of the Internet has reduced corruption by facilitating the dissemination of information about corrupt behavior, thus making it more risky for bureaucrats and politicians to take bribes. Using cross-country data and data for the 50 U.S. states, the authors test this hypothesis. Data spans the period during which the Internet has been in operation. In order to address the potential endogeneity problem, the authors develop a novel identification strategy for Internet diffusion. Digital equipment is highly sensitive to power disruption; it leads to equipment failure and damage. Even very short disruptions (less than 1/50th of second) can have such consequences. Accordingly, more frequent power failures will increase the user cost of IT capital; either directly, through depreciation, or indirectly, through the costs of protective devises. Ceteris paribus, the authors expect that higher IT user costs will lower the speed of Internet diffusion. A natural phenomenon which causes a major part of annual power disruptions globally is lightning activity. Lightning therefore provides exogenous variation in the user cost of IT capital. Based on global satellite data from the U.S. National Aeronautics and Space Administration (NASA), the authors construct lightning density data for a large cross section of countries and for the U.S.states. The authors demonstrate that the lightning density variable is a strong instrument for changes in Internet penetration, and proceed to show that the spread of the Internet has reduced the extent of corruption across the globe, and across the U.S. The size of the impact is economically and statistically significant.

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"Ruggedness: The Blessing of Bad Geography in Africa"
Nathan Nunn (Harvard)
Jointly written with Diego Puga (Madrid Institute for Advanced Studies)

Thursday, May 8, 12:30-2:00pm, room MC7-100

There is controversy about whether geography matters mainly because of its contemporaneous impact on economic outcomes or because of its interaction with historical events. Looking at terrain ruggedness, the authors are able to estimate the importance of these two channels. Because rugged terrain hinders trade and most productive activities, it has a negative direct effect on income. However, in Africa rugged terrain afforded protection to those being raided by slave traders. Since the slave trade retarded subsequent economic development, in Africa ruggedness also has had a historical indirect positive effect on income. Studying all countries worldwide, the authors find that both effects are significant statistically and that for Africa the indirect positive effect dominates the direct negative effect. Looking within Africa, the authors provide evidence that the indirect effect operates through the slave trade. They also show that the slave trade, by encouraging population concentrations in rugged areas, have also amplified the negative direct impact of rugged terrain in Africa.

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"Diversity and Development"
Oded Galor (Brown)

Thursday, May 15, 3:00-4:30pm, room MC7-100

This presentation combines two interrelated recent papers:

I. Cultural Assimilation, Cultural Diffusion and the Origin of the Wealth of Nations

This research argues that variations in the interplay between cultural assimilation and cultural diffusion have played a significant role in giving rise to differential patterns of economic development across the globe. Societies that were geographically less vulnerable to cultural diffusion, benefited from enhanced assimilation, lower cultural diversity and, thus, more intense accumulation of society-specific human capital, enabling them to flourish in the technological paradigm that characterized the agricultural stage of development. The lack of cultural diffusion and its manifestation in cultural rigidity, however, diminished the ability of these societies to adapt to a new technological paradigm, which delayed their industrialization and, thereby, their take-off to a state of sustained economic growth. The theory contributes to the understanding of the advent of divergence and overtaking in the process of long-run development, attributing the dominance of some societies within a given technological regime to a superior operation of cultural

II. Human Genetic Diversity and Comparative Economic Development

This research contributes to the understanding of human genetic diversity within a society as a significant determinant of its economic development. The hypothesis advanced and empirically examined in this paper suggests that there are socioeconomic trade-offs associated with genetic diversity within a given society. The investigation exploits an exogenous source of cross-country variation in genetic diversity by appealing to the "out of Africa" hypothesis of human origins to empirically establish a highly statistically significant and robust non-monotonic effect of genetic diversity on development outcomes in the pre-colonial era. Contrary to theories that reject a possible role for human genetics in influencing economic development, this study demonstrates the economic significance of diversity in genetic traits, while abstaining entirely from conceptual frameworks that posit a hierarchy of such traits in terms of their conduciveness to the process of economic development.

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"Instrumental Variables Regressions with Honestly Uncertain Exclusion Restrictions"
Aart Kraay (World Bank)

Thursday, May 22, 12:30-2:00pm, room MC5-100

The validity of instrumental variables (IV) regression models depends crucially on fundamentally untestable exclusion restrictions. Typically exclusion restrictions are assumed to hold exactly in the relevant population, yet in many empirical applications there are reasonable prior grounds to doubt their literal truth. In this paper the author shows how to incorporate prior uncertainty about the validity of the exclusion restriction into linear IV models, and explore the consequences for inference. In particular the author provides a mapping from prior uncertainty about the exclusion restriction into increased uncertainty about parameters of interest. Moderate prior uncertainty about exclusion restrictions can lead to a substantial loss of precision in estimates of structural parameters. This loss of precision is relatively more important in situations where IV estimates appear to be more precise, for example in larger samples or with stronger instruments. The author illustrate these points using several prominent recent empirical papers that use linear IV models.

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"Paths of Development and Dynamic Comparative Advantages: A Theoretical and Empirical View"
Rodrigo Fuentes (Central Bank of Chile)

Thursday, May 29, 12:30- 2:00pm, room MC8-100

This seminar will combine two interrelated papers:

I. "Paths of Development, Specialization, and Natural Resources Abundance": Using a factor-endowment-driven specialization model, this paper empirically addresses three main questions; how can a country specialized in primary goods become an exporter of manufacturing goods? How does factor abundance affect the possibilities of achieving comparative advantages in manufactures? Does the type of natural resource abundance make any difference to the path of development? Consistently with the idea that countries are located in different cones of diversification, we find that net exports of manufactures are a non-linear function of the capital/labor ratio of the economy. In addition, we show that changes in comparative advantage for manufacturing goods depend not only on the abundance of natural resources, but on the type of resources: mineral, forestry and agriculture.

II. "Development Paths and Dynamic Comparative Advantages: When Leamer Met Solow" An important condition for convergence is that countries share the same technology for the aggregate production function (Solow, 1956). If countries produce a different mix of products, they will naturally have a different aggregate production function. The authors argue that the inclusion of a fixed factor, such as natural resources, strongly determines the pattern of production and trade, and thus the path of development (Leamer, 1987) and the level of per capita consumption of a small open economy. The authors build a dynamic model of comparative advantages that naturally leads to different steady-state equilibria. The authors main findings are, first, that differences in income and capital per worker between countries with and without natural resources (and with different types of natural resources) are explained by the rent receive by the natural resource factor and the capital-labor ratio used in the natural resource sector relative to the other sectors. An economy that discovers a natural resource will almost always enjoy a higher level of consumption in steady state, although we describe one specific case in which it is not optimal to exploit the natural resource. Second, for economies without natural resources, becoming industrialized is always good (in terms of consumption). Nevertheless, countries with natural resources could end up with a less industrialized productive sector, but a higher level of consumption. Third, the main results are robust to the inclusion of foreign direct investment and domestic human capital accumulation.

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" Growing Up in Bad Times: Macroeconomic Volatility and the Formation of Belief"
Paola Giuliano (Harvard)
Jointly written with Antonio Spilimbergo

Thursday, June 12, 12:30-2:00pm, room MC3-101

The authors study the relationship between macroeconomic volatility and the formation of beliefs by matching self-reported individual answers with macroeconomic experience. The authors use the General Social Survey for the United States and the World Value Survey for a cross-country analysis. The authors show that individuals who are subject to macroeconomic volatility especially during early adulthood support more government redistribution, believe that individual success depends more on luck than effort and are less confident in several institutions. These findings shed light on the importance of the historical economic environment in shaping economic attitudes and beliefs.

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 "The Quality-Complementarity Hypothesis: Theory and New Evidence from Colombia"  
Eric Verhoogen (Columbia University) 
Jointly written with Maurice Kugler

Thursday, June 26, 12:30-2:00pm, room MC 3-570

This paper presents a tractable formalization and an empirical investigation of the quality-complementarity hypothesis, the hypothesis that input quality and plant productivity are complementary in producing output quality. The authors embed the quality-complementarity hypothesis in a general-equilibrium trade model with heterogeneous, monopolistically competitive firms, extending Melitz (2003), and show that the resulting model carries distinctive implications for two simple, observable within-sector correlations -- between output prices and plant size and between input prices and plant size -- and for how those correlations vary across sectors. Using uniquely rich and representative data on the unit values of outputs and inputs of Colombian manufacturing plants, the authors then document three facts: (1)output prices are positively correlated with plant size within industries, on average; (2) input prices are positively correlated with plant size within industries, on average; and (3) both correlations are more positive in industries with more scope for quality differentiation, as measured by the advertising and R\&D intensity of U.S. industries. The correlations between export status and input and output prices are similar to those for plant size. These facts are consistent with the quality-complementarity hypothesis, and difficult to reconcile with alternative models. Beyond recommending an extension of the Melitz (2003) model, the results generalize the well-known employer size-wage effect and highlight new mechanisms through which trade liberalization may affect industrial evolution in developing countries.

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"Foreign Aid and Real Exchange Rate Adjustments in a Financially Constrained Dependent Economy"
Valerie Cerra (IMF) and Serpil Tekin (Univ. of Washington)

Jointly written
with Stephen J. Turnovsky (Univ. of Washington)

Thursday, Sept. 4, 12:30-2:00pm, room MC 10-100

A dynamic dependent-economy model is developed to investigate the role of the real exchange rate in determining the effects of foreign aid. If capital is perfectly mobile between sectors, untied aid has no long-run impact on the real exchange rate. A decline in the traded sector occurs because aid, being denominated in traded output, substitutes for exports in financing imports. While untied aid causes short-run real exchange appreciation, this response is very temporary and negligibly small. Tied aid, by influencing sectoral productivity, does generate permanent relative price effects. The analysis, which employs extensive numerical simulations, emphasizes the tradeoffs between real exchange adjustments, long-run capital accumulation, and economic welfare, associated with alternative forms of foreign aid.

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 "Equilibrium Portfolios and External Adjustment under Incomplete Markets"
Roberto Rigobon (MIT and NBER)
jointly written with Anna Pavlova (London Business School and CEPR)

Thursday, Sept. 11, 12:30-2:00pm, room MC10-100

Recent evidence on the importance of cross-border equity flows calls for a rethinking of the standard theory of external adjustment. The authors introduce equity holdings and portfolio choice into an otherwise conventional open-economy dynamic equilibrium model. Their model is simple and it admits an exact closed-form solution regardless of whether financial markets are complete or incomplete. The authors derive a necessary and sufficient condition under which the current account is different from zero and shed light on the relationship between market incompleteness and the current account dynamics. Furthermore, the authors revisit the current debate on the relative importance of the standard vs. the capital-gains-based (or "valuation") channels of the external adjustment and establish that in our framework they are congruent. The authors demonstrate how countries’ portfolio compositions affect the dynamics of their external accounts and argue that a description of the international adjustment mechanism is incomplete if it does not encompass portfolio choice.

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 "Emerging Market Fluctuations: What Makes The Difference?"
Constantino Hevia (World Bank)

Thursday, Sept. 18, from 12:30-2:00, room MC10-100

Economic fluctuations in emerging market and developed open economies are different. This paper interprets these differences in terms of a small open economy model in which primitive distortions induce wedges between marginal rates of substitutions and marginal rates of transformations: an efficiency wedge affects productivity, a labor wedge affects the labor-consumption choice, an investment wedge affects capital accumulation, a risk premium wedge affects the intertemporal consumption choice, and a government wedge affects total resources. This paper estimates these wedges and studies their contribution to aggregate fluctuations using Mexico and Canada as representative emerging market and advanced open economies. Fluctuations in emerging economies are due mostly by efficiency wedges and, to a lesser extent, labor wedges and risk premium wedges. Fluctuations in advanced open economies are due mostly to labor wedges and, to a lesser extent, efficiency wedges. Investment wedges do not play a significant role in any of the countries. Therefore, to understand emerging market fluctuations we need to build models in which primitive distortions induce efficiency wedges; other distortions do not seem quantitatively important.

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  "Aggregate Effects of AIDS on Development"
Raul Santaeulali-Llopis (Washington Univ.)

Thursday, Sept. 25, 12:30-2:00, room MC10-100

In this paper the author studies the consequences of the AIDS epidemic for economic development. To this purpose the author builds a population model that keeps track of the demographic transition by age-specific population groups relating the age distribution of the population of each period to the preceding one via a fertility process, a mortality process and an aging process. The author integrates this population model into a standard theory of economic development that determines the income per capita path along the process of industrialization - a transition that structurally shifts capital and labor from a Malthusian-agricultural sector to a neoclassical-industrial sector. This way, the author constructs a structural relationship between the distribution of the population across age groups and the stage of economic development - in terms of income per capita and agricultural share of output. Then, the author uses this population model to consistently identify the main channels through which AIDS, raising mortality rates of young adults and lowering fertility rates, affects populations over time: (i) reshapes the age distribution of the population, thinning the ranks of working-age groups (the share of children and old adults per worker raises by as much as 20-25% in highly infected countries), (ii) reduces population growth (by as much as .08% per percentage point of HIV prevalence),  and (iii) reduces life expectancy (by as much as 15-20 years). In addition, AIDS also (iv) reduces the individual labor efficiency of the sick with an aggregate loss of 0.3% per percentage point of HIV prevalence. When the author incorporates the AIDS epidemic as in (i)-(iv) into a model economy calibrated to an African country unaffected by AIDS, he finds that the AIDS epidemic reduces per capita income by as much as 12% at the peak of the epidemic. The author finds also that the AIDS epidemic slows down the transition from agriculture to industry by about one century for the most highly infected countries.

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 "Misallocation and Manufacturing in China and India"
Pete Klenow (Stanford University and NBER)
Jointly written with Chang-Tai Hsieh (University of Chicago and NBER)

Thursday, Oct. 9, 12:30-2:00, room I2-210 

Resource misallocation can lower aggregate total factor productivity (TFP). The authors use micro data on manufacturing establishments to quantify the potential extent of this misallocation in China and India compared to the U.S. in recent years. Compared to the U.S., the authors measure sizable gaps in marginal products of labor and capital across plants within narrowly-defined industries in China and India. When capital and labor are hypothetically reallocated to equalize marginal products to the extent observed in the U.S., the authors calculate manufacturing TFP gains of 30-50% in China and 40-60% in India.

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"Hierarchic Government, Endogenous Policies, and Foreign Direct Investment: Theory and Evidence From China and India"
Yong Wang (World Bank)

Thursday, Oct. 16, 12:30-2:00, room MC10-100 

 By introducing a hierarchic government structure into Grossman and Helpman (1994,1996),  the authors construct a theoretical model to explain why two developing economies with similar economic fundamentals might have diametrically di¤erent amount of inward FDI as a means of technology adoption. The key mechanism is that the provincial government’s attitude toward FDI is endogenously polarized when the negative pecuniary externality between the domestic and foreign-invested rms decreases with FDI. The provincial government chooses either prohibitively high or attractively low institutional entry cost on FDI, depending on the pro…t tax rate and the tariff rate which are determined by the central government under the influence of the special interest group. The author de…fines and characterizes the symmetric and asymmetric political equilibrium to explain the policy variables, FDI, and GDP. The aggregate FDI level is always bifurcating, either null or full, in the economy with multiple identical provinces. The horizontal interaction between identical provincial governments might magnify the policy difference or result in an asymmetric FDI allocation. The author calibrates the model to China and Indians data and also performs several counterfactual experiments. The author …finds that China-India nine-fold difference in FDI per capita CAN be ultimately due to that China's central government obtains a higher share of total tax revenue than its India counterpart. It's because China's central government bene…ts more from FDI and then has more incentives to manipulate the policy pro…le which not only admits a positive FDI supply but also induces the provincial governments to compete for rather than block FDI. A global-game analysis when the entry cost is not common knowledge is provided in the appendix.  

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"Climate Change and Economic Growth: Evidence from the Last Half Century"

Benjamin Jones (Kellogg School of Management)

Jointly written with Melissa Dell (MIT) and Ben Olken (NBER)


Thursday, Oct. 30, 12:30-2:00, room MC10-100



This paper uses annual variation in temperature and precipitation over the past 50 years to examine the impact of climatic changes on economic activity throughout the world. We find three primary results. First, higher temperatures substantially reduce economic growth in poor countries but have little effect in rich countries. Second, higher temperatures appear to reduce growth rates in poor countries, rather than just the level of output. Third, higher temperatures have wide-ranging effects in poor nations, reducing agricultural output, industrial output, and aggregate investment, and increasing political instability. Analysis of decade or longer climate shifts also shows substantial negative effects on growth in poor countries. Should future impacts of climate change mirror these historical effects, the negative impact on poor countries may be substantial.

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 "Multilateral Debt Relief throughthe Eyes of Financial Markets"
 Claudio Raddatz (World Bank)


Thursday, Nov. 13, 12:30-2:00, room MC5-100


This paper conducts an event study to assess the economic consequences of multilateral debt
relief for benefited countries. It estimates the response of the stock prices of South African
multinationals with subsidiaries in those countries to the announcement of debt relief initiatives
and shows that they exhibit a significant increase above other firms, especially around the
launching of the recent Multilateral Debt Relief Initiative (MDRI). The improvement in financial
markets' assessment of the value of these multinationals is consistent with lower expected levels
of future taxation and, overall, the results are consistent with the debt overhang argument for
debt relief.


To obtain a copy of this paper, please  click here


"Capital Flows and Asset Trade: A Puzzle"

Aart Kraay (World Bank)

Jointly written with Jaume Ventura (CREI and Universitat Pompeu Fabra)

Thursday, Dec. 4, 12:30-2:00, room MC10-100

A striking feature of countries' net foreign assets positions is that they have been remarkably stable over the past 40 years.  Over the same period, there have been sharp declines in regulatory barriers to international asset trade and an explosion of countries' gross foreign assets and liabilities. The authors develop a tractable world equilibrium model of international capital flows that we use to (a) illustrate why this disconnect between net and gross asset trade poses a theoretical puzzle, and (b) to speculate about possible resolutions of this puzzle.

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"A Structural Model of Establishment and Industry Evolution: Evidence from Chile"
Murat Seker (World Bank)

Thursday, Dec. 18, 12:30-2:00, room MC10-100

Many recent models have been developed to fit basic facts on establishment and industry evolution. While these models yield a simple interpretation of the basic features of the data, they are too stylized to confront the micro-level data in a more formal quantitative analysis. In this paper, the author develops a model in which establishments grow by innovating new products. By introducing heterogeneity to a stylized industry evolution model, the author succeeds in explaining several features of the data, such as the thick right tail of the size distribution and the relations between age, size, and the hazard rate of exit, which had eluded existing models. In the model, heterogeneity in producer behavior arises through a combination of exogenous efficiency differences as in Melitz (2003) and accumulated innovations resulting from the past endogenous R&D investments as in Klette and Kortum (2004). Integrating these forces allows the model to perform well quantitatively in fitting data on Chilean Manufacturers. The counterfactual experiments show how producers respond to R&D subsidies and more competitive market environment.

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"Indirect, Long-term and Cumulative Effects of Natural Disasters"
Jose Miguel Albala Bertrand (University of London) and Jesus Crespo Cuaresma (University of Innsbruck)

Special debate-style double header session, co-sponsored with the Economics of Natural Disasters Seminar Series

Thursday, January 22, 12:30-2:00, room MC C1-200

On one hand, indirect, long-term and cumulative effects of disasters are little tractable to direct observation, especially at the macro level. The first speaker will argue how concepts of localization and networking, and in-built endogenous (private) reactions can have an important bearing on the importance of macroeconomic effects. The argument is that the more all-embracing and efficient the systemic network, including important private responses to disasters, the LESS likely the spreading of indirect effects and therefore their potential disaster impact on national macro-variables. This then has important implications for the appropriate role of public sector intervention: international and public responses could become more effective by harnessing such endogenous reactions and responses rather than bypassing them. Hence, the question is how to make such public ex-ante and ex-post responses systemically compatible with endogenous reactions, so as to increase the effectiveness and efficiency of disaster recovery in relation to long-term features of development.

On the other hand, it has been argued in the literature on the macroeconomic effects of natural disasters that, to the extent that natural catastrophes reduce the expected return to physical capital, rational individuals would shift their investment towards human capital. Conversely, in the framework of theoretical models with finitely-lived agents, the potential effect that natural disaster risk has on mortality would lead to a lower level of educational investment in disaster-prone countries. Building on a new global database on human capital as proxied by school enrollment, the author presents original theoretical and empirical analysis that tests these competing hypotheses by assessing empirically the relationship between natural disaster risk and investment in education. The empirical study is done by explicitly assessing the issue of model uncertainty by means of Bayesian Model Averaging. While the results in the empirical literature hitherto tend to be inconclusive, the author finds an extremely robust negative partial correlation between secondary school enrollment and natural disaster risk exposure. This result appears to be systematically related to geological disaster risk exposure.

"To Formalize or Not To Formalize? Comparisons of Microenterprise Data Southern and East Africa"
Alan Gelb (World Bank) and Vijaya Ramachandran (Center for Global Development)

Thursday, January 29, 12:30-2:00, room MC10-100

Why do firms choose to locate in the informal sector? Researchers often argue that the high cost of regulation prevents informal firms from becoming formal and productive. Our results point to a more nuanced story.

Using data from surveys of microenterprises in South Africa, Namibia, Botswana, Kenya, Uganda, Tanzania and Rwanda, we find that the labor productivity of informal firms is virtually indistinguishable from that of formal firms in East Africa but not in Southern Africa. We provide a theoretical model to explain this result, based on the key assumption that firms may evade taxes subject to a cost (or concealment cost) that is increasing and convex in the firm’s employment size. Consequently, the productivity distributions reflect the differences in concealment costs and the opportunity cost of formality in the two regions. Greater enforcement of laws and better provision of services such as finance and electricity to formally registered firms in Southern Africa means that firms are more likely to register; those that do not are likely to be operating as "survivalist" firms. But in East Africa, weak enforcement of tax payment and no significant difference in access to services between formal and informal firms means that these variables do not explain the allocation of firms across the informal-formal divide.

We conclude that in countries with weaker business environments such as those in East Africa, informal firms are just as likely as formal firms to increase their productivity as they grow. Thus, interventions to increase productivity and lower the cost of formality may be helpful. But in countries with strong business environments such as those in Southern Africa, owners of informal firms are likely to be better off entering the labor market as wage labor. In the latter case, investment in education or vocational training is probably more important.

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