Exogenous Productivity Research Articles

An Analysis of the Brazilian Legislation for Quality in Higher Education

Low-quality education is a major concern for public policy. In Brazil, the government addresses this issue with a Quality-Assurance Policy: colleges must be accredited before starting operation, and then are audited by the government periodically. Low-quality colleges suffer penalties that may include shutdown. This paper investigates the effectiveness of this policy in a signalling model in which education, whose quality is known, is used as a device for a worker to inform potential employers about his exogenous productivity. I have two main results. First, Quality-Assurance decreases the college sector, leaving students out. Second, it does not increase quality. Additionally, I show that high interest rates make the choice of high-quality sub-optimal for the college whatever the cost to provide quality, even if the Quality-Assurance Policy is most strict.

Dynamic Entry in Vertically Differentiated Markets

We develop a model of vertical innovation in which firms incur a market entry cost and choose a unique level of quality. Once established, firms compete for market shares, selling to consumers with heterogeneous tastes for quality. The equilibrium of the pricing game exists and is unique within our setup. Exogenous productivity growth induces firms to enter the market sequentially at the top end of the quality spectrum. A central feature of the model is that optimization problems of consecutive entrants are self-similar so that new firms enter in constant time-intervals and choose qualities that are a constant fraction higher than incumbent qualities. The asymmetries of quality choice, which inevitably arise because the quality spectrum has top and a bottom, is thus overcome by sequential entry. Our main contribution lies in handling these asymmetries.

The Role of Productivity and Financial Frictions in the Business Cycles of a Small Open Economy: Hong Kong 1984–2011

AbstractThis paper analyzes the business cycle properties of the Hong Kong economy during the 1984–2011 period, which includes the financial crisis experienced in 1997/98 and the economic crisis of 2008–2010. We show that the volatility respectively, of output, of the growth rate of output and of real interest rates in Hong Kong are higher than the corresponding average volatility among developed economies. Furthermore, interest rates are countercyclical. We build a stochastic neoclassical small open‐economy model estimated with a Bayesian likelihood approach that seeks to replicate the main business cycle characteristics of Hong Kong, and through which we try to quantify the role played by exogenous total factor productivity (TFP) shocks (transitory and permanent), real interest rate shocks and financial frictions. The main finding is that financial frictions, jointly with the assumption that the country spread is endogenous, seem important in explaining the countercyclicality of the real interest rates.

Deforestation Control and Agricultural Supply in Brazil

AbstractBrazil has dramatically increased its agricultural area under cultivation, in the process becoming a major food exporter at the cost of natural forests. A new challenge is to meet the food demands of an expanding world population in the face of pessimistic climate change scenarios and the increasing scarcity of land. Can Brazil help meet rising world food demand while conserving its tropical rainforests? To address this question we simulate outcomes using a large dynamic multiregional computable general equilibrium model of Brazil to model land use over 20 years in 90 zones and 14 agricultural sectors. The model features a land‐use change module based on a transition matrix obtained from satellite imagery. We analyze two scenarios of deforestation reduction, both linked to actual policy proposals. Model results indicate several mechanisms that allow food output to increase without expanding land supply. In particular, we stress the role of Brazil's vast, low‐yield pasture area as a source of future cropland. Thus, we find that controlling deforestation leads to rather small decreases in food output—which could be neutralized by tiny exogenous productivity improvements. We conclude that the decrease in deforestation will not significantly compromise Brazilian agricultural supply capacity in the foreseeable future.

Productivity and Organization in Portuguese Firms

The productivity of firms is, at least partly, determined by a firm's actions and decisions. One of these decisions involves the organization of production in terms of the number of layers of management the firm decides to employ. Using detailed employer-employee matched data and firm production quantity and input data for Portuguese firms, we study the endogenous response of revenue-based and quantity-based productivity to a change in layers: a firm reorganization. We show that as a result of an exogenous demand or productivity shock that makes the firm reorganize and add a management layer, quantity based productivity increases by about 4%, while revenue-based productivity drops by more than 4%. Such a reorganization makes the firm more productive, but also increases the quantity produced to an extent that lowers the price charged by the firm and, as a result, its revenue-based productivity.

Financial Accelerator at Work: Evidence from Corn Fields

This paper tests financial accelerator models. Using a novel dataset on agricultural production, we examine how exogenous productivity shocks arising from variation in temperature are propagated into the future. We find that past weather shocks have persistent effects on land values and productivity up to two years following the shock. Propagation and amplification of productivity shocks are both significantly larger during the farm debt crisis of the 1980s and amongst farms in lower income counties. Finally, we find higher investment in farm equipment and decreased borrowing following a positive weather shock.

Is Sky the Limit? Revisiting ‘Exogenous Productivity of Judges’ Argument

This paper revisits ‘exogenous productivity of judges’ hypothesis, laid down in numerous Law & Economics studies based on ‘production function’ approach. It states that judges confronted with growing caseload pressure, adjust their productivity thereby increasing number of resolved cases. We attribute such results to assumptions regarding the shape of court’s ‘production function’, and present alternative – hockey-stick ‘production function’ model, explicitly taking into account the time constraint faced by judges. Hence, we offer an attempt to reconcile ‘production function’ with more traditional approaches to the court performance – such as weighted caseload methods. We argue that such empirical strategy is particularly valuable in case of continental legal systems – characterized by higher procedural formalism. We also propose extended methodology of model evaluation, taking into account their ability to reproduce empirical regularities observed in ‘real world’ court systems.

Entry, trade costs, and international business cycles

Are firm entry and fixed exporting costs relevant for understanding the international transmission of business cycles? We revisit this question using a model that includes entry, selection to exporting activity, physical capital accumulation and endogenous labor supply. We determine that once the stochastic process for exogenous productivity is calibrated to consider the endogenous dynamics in TFP created by the number of firms and the time series volatility of entry is calibrated to the data, our model yields minimal departures from the Backus et al. (1992) benchmark. The richer model shares all of the successes of the previous model in terms of the volatilities of aggregate quantities, as well as its failures, in terms of replicating patterns of international co-movement and the volatility of international relative prices.

INSTITUTION-INDUCED PRODUCTIVITY DIFFERENCES AND PATTERNS OF INTERNATIONAL CAPITAL FLOWS

Abstract: This paper studies theoretically how the cross-country differences in the institutional quality (IQ) of the domestic credit markets shape the patterns of international capital flows when such IQ differences cause productivity differences across countries. IQ affects productivity by changing productivity-agency cost trade-offs across heterogeneous investment projects, which have opposite effects on the investment and capital flows from exogenous productivity differences. The overall effect of IQ could generate U-shaped responses of the investment and capital flows. This means that capital could flow from middle-income to low-income and high-income countries; and starting from a low IQ, a country could experience both growth and a current account surplus after an institutional reform. More generally, the results here offer some cautions when interpreting the evidence on the role of productivity and institutional differences on capital flows and question the validity of using financial frictions as a proxy for the quality of financial institutions.;

Inter-industry Productivity Spillovers: An Analysis Using the 1989–1998 Brazilian Trade Liberalisation

A major obstacle in the estimation of inter-industry (vertical) productivity spillovers is the need of an exogenous productivity shock. In this article, I propose the use of trade policy changes as a large productivity shock, since the literature has found evidence that trade liberalisations increase industry-level productivity. To do so, I develop a new empirical methodology using spatial econometrics, and apply it to the large economy-wide shock represented by the 1989–1998 Brazilian trade liberalisation. My results indicate the existence of positive and substantial upstream productivity spillovers. Nevertheless, no evidence of downstream productivity spillovers is found.

A Quantitative System of Monocentric Metros

The monocentric city framework is generalized to comprise a system of metros. A \representative closed metro calibrates parameters and establishes a reservation utility and perimeter land price that must be matched by an indeterminate number of open metros. The open metros have exogenous productivity dierent from that in the representative metro. Large changes to the parameterization and to key model assumptions often aect land use patterns in the representative metro only minimally but have rst-order eects on land usage in open metros. For a given level of productivity, transportation technology is the most important determinant of population, land area, population density, and house prices across and within metros. Changes in highway capacity signicantly aect these quantities while leaving commute speeds unchanged. Telecommuting one workday per week increases the population of already crowded metros by as much as one third. Open metro land area asymptotes to a maximum at only moderately high relative productivity. A high threshold productivity is required for potential metro land to exceed is agricultural opportunity cost. The framework yields a number of quantitative insights into how preferences, production technologies, and transportation technologies shape outcomes within and across metros.

Convergence, capital accumulation and the nominal exchange rate

This paper develops a flexible price, two-sector growth model with a nominal side to study the role of the exchange rate in transition dynamics. We adopt a standard small open economy model with traded and nontraded goods, where the engines of growth are exogenous productivity improvements and capital accumulation. We enhance this standard framework by adding a preference for real money holdings, captured by money-in-the-utility. We follow Schmitt-Grohé and Uribe (2003) and assume that the interest rate on bonds issued by the small open economy is debt-dependent, and interpret it as a simple financial friction. We show analytically that the choice of the exchange rate regime influences the transition dynamics of a small open economy through the balance sheet of the central bank. We then calibrate the model to explore the quantitative significance of our results. We find that the choice of the exchange rate regime has significant and lasting effects on prices, consumption, investment and sectoral allocations, and the composition of financial assets.

Exchange Rates and Asset Prices: Heterogeneous Agents at Work

This paper merges two branches of the literature. On one hand we study a heterogeneous agents framework to model exchange rates and stock prices. On the other hand we model the relationship between these two series through a DSGE model. Investors choose one of two rules to form their expectations. One rule is based on an open economy model, which reacts to the information from the financial markets. The second rule follows a backward looking approach. We find that when DSGE agents misinterpret the information coming from the financial markets as exogenous productivity shocks they unknowingly amplify the volatility of these markets. The simulated series replicate the stylized facts of real data. We also estimate the DSGE and chartists expectations, and we find that our DSGE agents make output forecasts that are not qualitatively different than the DSGE forecasts from the recent Bayesian literature.

Produttività e innovazione: un approccio spaziale

The paper assesses geographic spillovers of firms’ total factor productivity (TFP) through the lens of spatial econometrics. The aim is to use patent data to link the concepts of productivity and innovation, as well as to shed light on the role played by industrial agglomeration economies. TFP estimates are based on a panel of around sixteen thousand Italian manufacturing firms surveyed in the 2004-2010 period, allowing for labor and capital productivity coefficients to vary over sectors of activity. The TFP spillover is then estimated using a spatial autoregressive model with spatial autoregressive disturbances focused on 2010 firm-level geo-referenced data. The results show that firm TFP levels benefit from both the productivity spillovers originated by neighboring firms and the exogenous productivity shocks to the latter. To be part of an agglomeration economy results in productivity advantages. The location in a patent-intensive area acts in the sense of strengthening these effects but results, in turn, to be an advantage also for firms outside districts, thus corroborating the findings of an active role played by innovation in enhancing productivity.

Exchange Rates and Asset Prices: Heterogeneous Agents at Work

This paper merges two branches of the literature. On one hand we study a heterogeneous agents framework to model exchange rates and stock prices. On the other hand we model the relationship between these two series through a DSGE model. Investors choose one of two rules to form their expectations. One rule is based on an open economy model, which reacts to the information from the financial markets. The second rule follows a backward looking approach. We find that when DSGE agents misinterpret the information coming from the financial markets as exogenous productivity shocks they unknowingly amplify the volatility of these markets. The simulated series replicate the stylized facts of real data. We also estimate the DSGE and chartists expectations, and we find that our DSGE agents make output forecasts that are not qualitatively different than the DSGE forecasts from the recent Bayesian literature.

Capital utilization in Japan's lost decade: A neoclassical interpretation

This paper attempts to reconcile the controversy regarding Japan's total factor productivity during its slump in the 1990s by clarifying the role of capital utilization. Hayashi and Prescott (2002) emphasized that the decline in the exogenous total factor productivity growth rate was the main cause. However, some empirical studies have also pointed out that the fall in capital utilization rates accounted for a large part of the decline in the total factor productivity growth rate. In this study we incorporate variable capital utilization into a neoclassical growth model, calculate total factor productivity taking into account capital utilization, and simulate the aggregate output and capital-output ratio. We found that although our total factor productivity growth rate in the 1990s is consistent with empirical studies, our simulation can explain the observed data. This result indicates the importance of capital utilization rates as a source of propagation during Japan's depression.

Accounting for global dispersion of current accounts

We develop a multi-country quantitative model of the global distribution of current account and external balances. Countries accumulate domestic capital and foreign assets to smooth consumption over time against exogenous productivity shocks in the presence of liquidity constraints. In equilibrium, optimal consumption and investment responses to persistent productivity shocks imply a degree of intertemporal substitution across countries that can explain up to one-third of the current account dispersion in the data.

The relationship between total factor productivity growth and employment: some evidence from a sample of European Regions

This paper provides a structural estimation of an equilibrium matching model with exogenous productivity growth on a sample of European Regions for the period 1976–2000. Using a three-stage least squares procedure, I estimate a simultaneous equation model for employment, wages and capital stock. The importance of the study of the relationship between growth and employment is due to the fact that the sign of this connection is not clear-cut. Theoretical models imply that the impact of productivity on employment is ambiguous. Furthermore, the empirical contributions are still not so many to reach a strong conclusion on the sign of the relationship above. This paper finds that the impact of productivity growth on employment is negative in the short-run and this effect remains negative even in the long-run. The implication of my results is that all new technology is embodied in new jobs and job creation plays no role in the employment dynamics of the sample I have considered.

Debt and Creative Destruction: Why Could Subsidizing Corporate Debt Be Optimal?

The existing theoretical literature provides little justification for a corporate debt subsidy. We illustrate the welfare benefit of this subsidy and study how the social costs and benefits change with the duration of industry distress. In our model, two firms engage in socially wasteful competition for survival in a declining industry. Firms differ on two dimensions: exogenous productivity and endogenously chosen amount of debt financing, resulting in a two-dimensional war of attrition. Debt financing increases incentives to exit, which, although costly for the firm, is socially beneficial. These benefits decline as industry distress shortens. Our normative model sheds light on why the debt tax subsidy still persists around the world. Analogously, the model can also rationalize a seemingly ad hoc feature of the U.S. tax system, which subsidizes the conflict of interest between debt and equity regarding firm liquidation. This paper was accepted by Amit Seru, finance.

ENDOGENOUS SELECTION OF PRODUCERS, ASSET PRICES, AND PRODUCTIVITY SLOWDOWN*

This paper presents a simple heterogeneous agent model to show that shocks that reduce aggregate borrowing capacity of producers under borrowing constraints cause endogenous productivity slowdowns through declines in asset prices and biased selections of producers. These dynamics of the model replicate the qualitative features of the Japanese economy during the 1990s, including a decline in the within effect in total factor productivity growth decomposition as well as default on mortgage loans. Policy experiments demonstrate that foreclosure restrictions already in place mitigate an exogenous productivity slowdown, but that a tightening of foreclosure restrictions causes an endogenous productivity slowdown.