Working papers results

This paper investigates the determinants of group membership, and in particular the effect of income inequality on individual incentives to join economic groups. Drawing on a simple model, we show that an increase in inequality has an ambiguous effect and that the type of access rule (open versus restricted access) is key in determining what income categories are represented in the group. Furthermore, the shape of the income distribution can be crucial to determine whether increased inequality leads to more or less group participation. Using survey data from rural Tanzania we find that inequality at the village level has a negative impact on the likelihood that the respondents are members of any group. This effect is particularly significant for relatively wealthier people, both when relative wealth is "objectively" measured, and when it is "subjectively" defined. However, when we disaggregate groups by type of access rule, we find that inequality decreases participation in open access groups when there are wide disparities at the bottom of the distribution, while it increases participation in restricted access groups when the disparities are around the middle and top part of the distribution. Finally we assess the impact of inequality on various dimensions of group functioning.

We propose a general framework to study whether and how common trends and common cycles are still present when the original variables are linearly aggregated or only a subset of them is analysed. This is particularly important because of the adoption in empirical analysis of aggregated data on a limited number of variables.

This paper develops tests for selection of competing non-linear dynamic models. The null hypothesis is that the models are equally close the Data Generating Process (DGP), according to a certain measure of closeness. The alternative is that one model is closer to the DGP. The models can be non-nested, overlapping, or nested. They can be correctly specified or not. Their parameters can be estimated by a variety of methods, including Maximum Likelihood, Non-Linear Least Squares, Method of Moments, where the choice depends on the selected measure of closeness to the DGP. The tests are symmetric and directional. Their asymptotic distribution under the null is either normal or a weighted sum of chi-square distributions, depending on the nesting characteristics of the competing models. The comparison of ARMAX and STAR models, and of nested ARMAX-GARCH models are discussed as examples.

The increasing literature on the interactions between liberalisation-integration of product markets and labour market reforms is often highly speculative and draws on a rather weak empirical basis. Cross-country indicators of regulatory frameworks are often lacking, making it difficult to identify the linkages with observed outcomes in the labour and product markets. Moreover, empirical studies have often focused exclusively on the impact of certain labour market regulations, largely ignoring the role of product market regulations and the interactions between regulatory interventions in the two markets. As a result, while there are convincing theoretical arguments pointing to a potentially positive effect of product market liberalisation on labour market performance, empirical investigations of this issue are lacking. This paper aims at providing some preliminary evidence on these issues. In particular, the cross-country patterns and changing profile of product and labour market regulations are identified. Evidence on the relationships between product and labour market regulations is discussed in the context of other policies and institutional factors affecting the labour market; and the clustering and convergence of institutions across countries are characterised. More importantly, the paper reports evidence of a potentially significant impact of product and labour market regulations on employment and its composition. The evidence presented draws heavily on a novel set of cross-country indicators of regulation in the product and labour markets assembled at the OECD. It should be stressed at the outset that these indicators are preliminary estimates and should be taken only as rough approximations of the regulatory stance across OECD countries.

In the transitional phase towards full economic integration, European countries have the possibility of re-shaping the continental geography of specialization. We develop a two-sector two-country model that shows formally how fiscal policy can be critical in promoting specialization in a phase where increasing returns are strong enough to sustain agglomeration but local barriers are too high for agglomeration to arise endogenously. We show that, in this intermediate phase, the optimal policy is to levy asymmetric taxes on the two sectors in order to induce agglomeration and therefore welfare benefits to both countries.

I explore the dynamics of national production in a two-sector, two country model with cross-sector mobility and forward-looking agents, when trade costs fall or when the news of a boom in a sector is learned. Using the phase diagram method, introduced by Baldwin 1999 in this type of applications, I discover some important and interesting features of the equilibria and of their stability properties, which would have been completely overlooked by the "simple" static model as in Fujita et al. 1999. In particular I find out that, lacking comparative advantage, specialization may not take place at all labor market rigidities are too high, while the existence of comparative advantage ensures full specialization for intermediate values of the trade cost even in the presence of high labor market rigidities.

Europe is faced with serious problems of slow growth and little employment creation. Are the two problems related at all? Our proposed answer is: yes, they are. Building on Daveri and Tabellini (1997), we developed an infinite-horizon model with endogenous growth due to learning-by-doing and unemployment due to monopoly union bargaining in the labor market. In this framework, high labor and capital taxes and unemployment subsidies may in principle reduce employment and growth. The model is then calibrated using actual data from a variety of countries in Continental Europe, which we identify as the closest to our toy model. We run two types of balanced-budget fiscal policy experiments, focusing on their employment and growth effects .First, we separately change tax rates on capital, labor and subsidies, as well as replacement rates, while assuming that the government budget is kept balanced by appropriate changes in lump-sum trasnfers. Second, we cut labor taxes and adjust capital taxes in order to keep the GDP share of lump-sum transfers unchanged. Our numerical results suggest that, in the absence of binding revenue constraints, reducing labor taxes and unemployment subsidies is beneficial to both employment and growth, while capital taxes are less useful. if revenue constraints are binding, instead, cutting labor taxes is in general ineffective in boosting employment and growth.

The adjustment of labour markets during transition has been quite different from that anticipated by the Optimal Speed of Transition (OST) literature. In particular, it has involved stagnant unemployment pools, large flows to inactivity and strikingly low workers mobility especially when account is made of the changes occurring in the structure of employment by sector, occupation and ownership of firms.

Furthermore the policy trade-offs embedded in the OST literature relate mainly to the alternative between a big-bang strategy and a gradual transition process. This amounts to assuming that governments can control the pace of closure of state enterprises. However, the facts discussed in this paper suggest that separations from state sector employment were, ultimately, an endogenous variable rather than a policy instrument, as they were to a large extent the byproduct of voluntary choices of workers.

The Importance of innovation for the economic performance of industrialized countries has been largely stressed recently by the theoretical and empirical literature. Very few studies have carefully considered the determinants of European innovation, the productivity of its R&D and the existence of knowledge spillovers across regional boundaries. Here we develop a model which, emphasizing "the demand pull" as a key exogenous determinant of long-run innovation across regions, allows us to estimate the returns to regional R&D as a generator of innovation. We find that most of the cross-regional differences in innovation rates can be explained by own R&D, even after correcting for the endogeneity bias. Moreover, significant spillovers are found among geographically close regions, especially if they are technologically similar.

Returns to scale to capital and the strength of capital externalities play a key role for the empirical predictions and policy implications of different growth theories. We show that both can be identified with individual wage data and implement our approach at the city-level using US Census data on individuals in 173 cities for 1970, 1980, and 1990. Estimation takes into account fixed effects, endogeneity of capital accumulation, and measurement error. We find no evidence for human or physical capital externalities and decreasing aggregate returns to capital. Returns to scale to physical and human capital are around 80 percent. We also find strong complementarities between human capital and labor and substantial total employment externalities.