Capability accumulation and product innovation: an agent-based perspective

This paper studiesthe relevance of productheterogeneity and relatedness for the accumulation ofcapabilities in firms, as well as their implications for innovation dynamics. The existing literature has produced extensive evidence on the relevance of capability accumulation for innovation processes. Yet, an assessment of prior attempts to model these processes indicates that when it comes to the final consumption good sector, the evolutionary macroeconomic literature has focused on process rather than product innovation. To facilitate the consideration of empirical and microeconomic insights on product innovation in these models, this paper introduces a simple agent-based model, which may later serve as an innovation module in macroeconomic models. In the model, firms accumulate capabilities to produce final consumption goods that are heterogeneous in terms of their complexity and differ in their relatedness to each other. The model is used to study theoretical implications of different topological structures underlying product relatedness by conducting simulations with different ‘product spaces’. The analysis suggests that the topological structure of the product space, the assumed relationship between product complexity and centrality, as well as the relevance of product complexity in price setting dynamics have significant but nontrivial implications and deserve further attention in evolutionary macroeconomics.

A NOTE ON BALANCED-BUDGET INCOME TAXES AND AGGREGATE (IN)STABILITY IN MULTI-SECTOR ECONOMIES

We examine the impact of balanced-budget labor income taxes on the existence of expectation-driven business cycles in a two-sector version of the Schmitt-Grohé and Uribe (SGU) [(1997) Journal of Political Economy 105, 976–1000] model with constant government expenditures and counter-cyclical taxes. Our results show that the destabilizing impact of labor income taxes strongly depends on the capital intensity difference across sectors. Local indeterminacy is indeed more likely when the consumption good sector is capital intensive, as the minimal tax rate decreases, and less likely when the investment good sector is capital intensive, as the minimal tax rate increases. The implication of this result can be quantitatively significant. Indeed, when compared to SGU, local indeterminacy can be either completely ruled out for all OECD countries when the investment good is sufficiently capital intensive or drastically improved, delivering indeterminacy for a larger set of OECD countries, if the consumption good is sufficiently capital intensive. Focusing however on recent estimates of the sectoral capital shares corresponding to the empirically plausible case of a capital intensive consumption good, we find that there is a significant increase of the range of economically relevant labor tax rates (from a minimum tax rate of 30% to 24.7% for which local indeterminacy arises with respect to the aggregate formulation of SGU.

Distortions, Misallocation and the Endogenous Determination of the Size of the Financial Sector

We present a model of heterogeneous firms and misallocation in which financial frictions are partially overcome if more human resources are devoted to intermediation, at the cost of having fewer resources employed in directly productive activities. Not only does an inefficient financial sector result in an inefficient final good sector; an inefficient final good sector results in an inefficient financial sector. Exogenous inefficiencies in the productive sector generate decreased demand for financial services, which translates into a smaller and less efficient financial sector, worsening the resource allocation in the productive sector. This direction of causality seems in line with cross-country evidence.

Political Economy and Governance

This chapter reviews the political economy of extractive resources and the resources governance agenda. The consensus that good sector governance improves the developmental impacts of extractive resources exploitation is premised on the understanding that institutions matter for development. However, there is no straightforward answer to the question of what exactly ‘institutions’ are, how they change, or how they can be made to change to become more supportive of an extractives-led development agenda. The chapter suggests turning from the negative question ‘how can poor outcomes be prevented?’ towards the positive question ‘how can positive institutional change be brought about?’ It presents the main strands of a substantial body of literature that can help to inform answers to this question.

LOCAL INDETERMINACY IN CONTINUOUS-TIME MODELS: THE ROLE OF RETURNS TO SCALE

The aim of this paper is to discuss the effect on returns to scale on the local determinacy properties of the steady state in a continuous-time two-sector economy with endogenous labor supply and sector-specific externalities. First we show that when labor is inelastic and the elasticity of intertemporal substitution in consumption is large enough, for any configuration of the returns to scale, local indeterminacy is obtained if there is a capital intensity reversal between the private and the social levels. Second, we prove that when labor is infinitely elastic, saddlepoint stability is obtained if the investment good sector has constant social returns, whereas local indeterminacy arises if the investment good sector has increasing social returns and the elasticity of intertemporal substitution in consumption admits intermediate values. Finally, our main conclusion shows that local indeterminacy requires a low elasticity of labor when the investment good has constant social returns, but requires either a low enough or a large enough elasticity of labor when the investment good has increasing social returns.

A Consumption Model of Income Inequality

This article focuses on the inequality of incomes between the very rich and the rest of society. Accordingly, it measures inequality as the ratio of the share of national income of the top five percent of households over the share of the rest of society. It shows that this measure of inequality increases when productivity grows in the manufacturing sector and decreases when productivity grows in the nonmanufacturing sector. These results suggest the rich earn relatively more when productivity lags in the nonmanufacturing sector. A model is presented that provides an explanation for these results. With complete markets, risk-averse individuals will hold a portfolio of assets that effectively produces the goods they intend to consume in order to insure they get the consumption mix they want. Since the rich spend relatively more on superior goods, they will hold relatively more assets in the superior good sector. When productivity grows in the necessity sector, the relative price of superior goods increases and the rich, holding relatively more of the assets producing superior goods, will become richer. The opposite occurs when productivity grows in the superior-good sector. Evidence suggests that nonmanufactured goods are superior goods.