Working Papers

9. “Endogenous Social Networks and Inequality in an Intergenerational Setting.” August 2, 2015. PDF.

Abstract. In a world where individuals interact in myriads of ways, one wonders how the benefits of one’s connections with others compare with those conferred by individual characteristics when it comes to acquisition of human capital. It is particularly interesting to be able to distinguish between connections that are the outcome of deliberate decisions by individuals and connections being given exogenously and beyond an individual’s control. The paper explores the consequences of the joint evolution of social connections and human capital investments. It thus allows one to study a broad range of possibilities in which social connections may influence inequality in consumption, human capital investment and welfare across the members of the economy, cross-sectionally and intertemporally. It embeds inequality analysis in models of endogenous social network formation. The novelty of the model lies in its joint treatment of human capital investment and social network formation in intergenerational settings, while distinguishing between the case of impact on human capital from endogenous as opposed to exogenous social networking. Among several results in the case of exogenous connections, we demonstrate conditions under which the limit distribution of human capital has a Pareto upper tail.

One of the dynamic models we develop allow for intergenerational transfers in a dynastic version of the infinite horizon Ramsey-Cass-Koopmans model. The models share the property that human capital accumulation, transfers and social connections, when all are optimized, are, along steady states, proportional to cognitive skills. Thus, intergenerational transfers of both human capital endowments and social networking endowments are jointly determined. Interestingly, the consequences for inequality of the endogeneity of social connections are underscored by examining the models when they are assumed to be exogenous. When social connections are not optimized, individuals’ human capital reflect a much more general dependence on social connections. The dependence does not reduce to aggregate statistics of social connections. We show that the dynamics of demographically increasingly complex models, as expressed by a sequence of models with increasing number of overlapping-generations, depend on the product of the adjacency matrices associated with each of the overlapping generations.

 

8. “Spatial Effects and House Price Dynamics in the U.S.A.” With Jeffrey Cohen and Win (Wirathip ) Thanapisitikul. February 17, 2015. PDF

Abstract. This paper examines spatial effects in house price dynamics. Using panel data from 363 US Metropolitan Statistical Areas for 1996 to 2013, we find that there are spatial diffusion patterns in the growth rates of urban house prices. Lagged price changes of neighboring areas show greater effects after the 2007-08 housing crash than over the entire sample period of 1996-2013. In general, our findings are robust to controlling for potential endogeneity, and for various spatial weights specifications (including contiguity weights and migration flows). These results underscore the importance of considering spatial spillovers in MSA-level studies of housing price growth.

7. “A DMP Model of Intercity Trade.” February 3, 2015PDF

Abstract.The paper presents a model of an economy whose urban structure consists of cities of different types. All cities produce a non-tradeable final good using both types of tradeable intermediate varieties. Each city has an internal spatial structure: individuals commute to the CBD in order to work, when employed, and to seek jobs, when unemployed. Hiring by each intermediate producing firm is subject to frictions, which are modeled in the Diamond–Mortensen–Pissarides fashion. Job matching requires either travel to the CBD for face to face contacts or, alternatively, referrals from social contacts. City type is conferred by specialization in producing one of two types of intermediate varieties, diversified cities, where both types are produced, and there is intercity trade in intermediate varieties. The paper examines the properties of equilibrium with intercity trade and its dependence on such parameters as those pertaining to productivity, the matching process,  the rate of job destruction and their consequences for unemployment, output and welfare across the economy along a steady state. The model’s use of international trade tools confers a central role to labor market tightness, akin to factor intensity. A natural dependence of unemployment on city size is generated. The paper provides a framework for studying spatial mismatch.  Equilibrium outcomes generically diverge from the  planner’s optimum: socially optimal unemployment trades off the probability of employment to search costs of firms independently for each skill type and independently of city size, and city sizes are independent of labor market tightness considerations but reflect both market size effects and the skill composition of the economy. (Related to talk, titled: Urban Business Cycles through a DMP Lens: The Steady State Case.”)

6. “Why Productivity Enhancing Reforms Will Help Greece Exit the Crisis and Usher in Long Run Growth.” January 24, 2015. PDF.

Abstract.  The paper first assesses various ideas about getting growth started, and what might be hampering that. It also details what we could expect in the way of productivity growth when reforms currently envisioned and hopefully in progress are brought to fruition. The discussion draws extensively from the case of the Finnish Great Depression, an episode that all things considered is quite similar to the Greek crisis, which could well justify the term Greek Great Depression. It was precipitated by the shock of the collapse of the Soviet Union, Finland’s greatest trading partner at the time, but was also accompanied by a banking and credit crisis. It was followed by an admirable period of economic growth, which I find a rich source of lessons for the Greek crisis. The paper details growth-hampering features of the Greek educational system and discusses in depth growth-enhancing properties of market deregulation. Small improvements in each of many markets and industries can add up to significant contributions to Greece’s total factor productivity growth performance. Second, in the immediate aftermath of fiscal stabilization, the problem of the Greek trade deficit, which some consider as the principal cause of the crisis remains acute. The considerable improvement in unit labor costs that has taken place has not been followed by a commensurate improvement in the trade deficit. Recapturing and realizing gains in foreign markets is in part a problem that Greece shares with other “peripheral” EU countries, and to a degree not sufficiently appreciated and widely discussed. Real appreciation of the euro appears to be mainly due nominal exchange rate appreciation rather than domestic costs (measured via either unit labor costs or the consumer price index). This in turn suggests that in order for Greece to improve its advantage in international markets it needs to accelerate its effort at productivity improvements and just as much at growth-enhancing product market reforms.

 

5. “Walled Cities in Late Imperial China.” With Junfu Zhang, November 2, 2014 PDF

Abstract. For thousands of years, the Chinese and many other nations around the world built defensive walls around their cities. This phenomenon is not well understood from an economic perspective. To rationalize the existence of city walls, we propose a simple model that relates the dimensions of city walls to a set of economic variables. Guided by this model, we conduct an empirical analysis using hand-collected and previously unused data on city walls in the Ming (1368-1644) and Qing (1644-1911) Dynasties. Consistent with the model, we find that the circumference of a city wall is positively correlated with population size in the jurisdiction and that frontier cities subject to a higher probability of attack tended to have stronger city walls. Since a city wall imposes a physical boundary around a city, the land area inside the city wall provides a natural proxy of city size. We examine the physical size distribution of walled cities in late imperial China. We find that city sizes above a certain cutoff follow Zipf’s law, although the Zipf coefficient is sensitive to the choice of the cutoff point. This result complements findings in the existing literature that focuses almost exclusively on the population size distribution of cities.

4. “Thinking about Corruption in Greece.” with Costas Azariadis. May 24, 2014. Rev. February 20, 2015. PDF

Abstract. The paper addresses the issue of corruption, which appears to be endemic in Greece. It reviews the facts about corruption as a multifaceted phenomenon and its close relationship to tax evasion, by comparing Greece to its EU partners as well internationally. It addresses corruption as an instance of anti-social behavior by means of a number of simple metaphors that allow reliance on powerful tools of modern social interactions and property rights literatures. It emphasizes that whereas tepid enforcement might reduce somewhat corruption and other instances of anti-social behavior, drastic enforcement is required to move an economy and society to qualitatively different levels of such practices. The paper reviews different EU proposals regarding enforcement mechanisms and proposes three key constitutional amendments that are required to allow long-delayed reforms to take hold in Greece.

3. “Large versus Small States in The Eurozone, The Democratic Deficit, and Future Architecture.”  December 16, 2013. PDF Slides 

Abstract.  The Eurozone (EZ) is at a crossroads. The global financial crisis revealed the importance of the dearth of macro policy tools available to members of the European monetary union. This is in stark contrast to US. A critical issue, taken up by this paper is the limits to monetary policy tools in the absence of a fiscal union. This is the case for the Eurozone, in sharp contrast to the US fiscal union. The paper reviews the differences in various macro policy parameters between the US and the Eurozone. It then develops a stylized model of a fiscal union within a monetary union and examines broad policy options and advantages that adding a fiscal union confers on a monetary union.

2. “Searching for the Best Neighborhood: Mobility and Social Interactions,” with Giulio Zanella, April 2008. PDF Under revision.

Abstract.  The paper seeks to contribute to the social interactions literature by exploiting data on individuals’ self-selection into neighborhoods. We study a model in which households search for the best location in the presence of neighborhood effects in the formation of children’s human capital and in the process of cultural transmission. We use micro data from the PSID which we have merged, using geocodes, with contextual information at the levels of census tracts and of counties from the 2000 US Census. We control for numerous individual characteristics and neighborhood attributes and find, consistently with neighborhood effects models, that households with children, but not those without, are more likely to move out of neighborhoods whose attributes are not favorable to the production of human capital and the transmission of parents’ cultural traits, and to move into neighborhoods which instead exhibit desirable such attributes.

1. “Random Graphs and Social Networks: An Economics Perspective,” Revised June 2015. PDF

Abstract. This review of current research on networks emphasizes three strands of the literature on social networks. The first strand is composed of models of endogenous network formation from both the economics and the computer science literature. The review highlights the sensitive dependence of the topology of endogenous networks on parameters of the behavioral models employed. The second strand draws from the recent econophysics literature in order to review the recent revival of interest in the random graph theory. This mathematical tool allows one to study social networks that result from uncoordinated random action of individuals in setting up connections with others. The review explores a number of examples to assess the potential of recent research on random graphs with arbitrary degree distributions in accommodating more general behavioral motivations for social network formation. The third strand focuses on a specific model of social networks, Markov random graphs,  that is quite central in the mathematical sociology and spatial statistics literatures but little known outside those literatures. These are random graphs where the events that different edges are present are dependent, if edges are incident to the same node, and   independent, otherwise. The paper assesses the potential for economic applications with this particular tool. The paper concludes with an assessment  of observable consequences of optimizing behavior in networks for the purpose of estimation.