Working Papers

9. “On the Dynamics of Corruption.” With Costas Azariadis. April 14, 2021.  PDF

Abstract. To examine the impact of culture on the joint evolution of corruption and per capita GDP, we augment the standard lifecycle model of capital accumulation by two endogenous state variables that describe institutions and social norms, and by two cultural parameters that proxy for personal morality, and group individualism or collectivism. Institutions that regulate economic incentives are decided by majority vote over a one-dimensional agenda that pits “stronger” against `weaker” property rights. For societies that share the same economic fundamentals but differ in culture, our main theoretical finding is the following: there exist cultural convergence clubs separated by a barrier that corresponds to a bifurcation in the space of collectivism and initial social norms. Societies with collectivist cultures and corruption-tolerant norms behave very differently from all others. Outcomes in those societies feature: (a) highly nonlinear GDP and corruption dynamics; (b) dominant roles for culture and social norms as engines of institutional quality and growth; (c) majorities that favor diluted property rights; and (d) slow convergence to balanced growth paths. These results appear to agree with scatter plots from international data for several alternative measures of corruption or culture, raising the likelihood that formal econometric tests of them will prove fruitful.

JEL codes: F43, O11, O43, O47, D70, E71, Z10. Keywords: growth, institutions, corruption, social norms, culture, voting, social interactions.

8. “International Tourism and Short-Run Growth.” With Yuxian Chen. August 30, 2020. PDF

Abstract.  Using a panel of 157 countries for 1995–2017, this paper explores the relationship between tourism specialization and short-run growth. Making use of bilateral tourism and manufacturing flows, differences in importing countries’ preference , and demand side shocks, defined in terms of GDP per capita of tourism-importing countries, we construct an instrument for tourism specialization. 2SLS estimation results are very close to those obtained with OLS estimation results, but are associated with larger standard errors. We find that an 1% increase in tourism specialization is (on average) associated with 0.01 percentage point (or 0.5% in terms of elasticity) increase in the growth rate of GDP per capita for OECD countries, though it does not have a statistically significant effect when all countries are included. post: “International tourism and short-run growth: Reviewing the trade-off in the age of COVID-19.” With Yuxian Chen. September 15, 2020

7. “Endogenous Social Networks and Inequality in an Intergenerational Setting.” Rev. Aug. 16, 2021. PDF.  Human Capital and Economic Opportunity Global Working Group paper. Version with Appendix

Abstract. The paper examines the interactions between human capital investment and social networking as well as their joint evolution, where the network may be endogenous or exogenous. It extends Cabrales, Calvo-Armengol and Zenou (2011) to dynamic settings with intergenerational transfers of human capital and social networking endowments as joint decisions in a Ramsey-Cass-Koopmans model as well as in overlapping-generations models of increasing demographic complexity. Dynamic counterparts of social multipliers are shown to characterize the social equilibria. The associated intergenerational transfer elasticities exhibit rich dependence on social effects. A “Great Gatsby curve”–type property is predicted for intergenerational transfers in relation to inequality in parents’ human capitals. The model with exogenous networking highlights the partially separable effects on human capital dispersion of social connections alone, as distinct from their joint effects with the intertemporal evolution of skills. Multiple Pareto-rankable non-autarkic steady state equilibria may exist, the lower of which are associated with complementarity between decisions of individuals and the cognitive skills coefficients of their social contacts and are dynamically stable, and the higher of which are associated with substitutability between decisions of individuals and the cognitive skills coefficients of their social contacts and are dynamically unstable. The stochastic steady states of the social network allow us to study the cross-sectional human capital distribution due to shocks to certain model parameters that are interpreted as shocks to cognitive and social skills coefficients.

6.  “International and Intercity Trade, and Housing Prices in US Cities.” With Jeffrey P. Cohen. November 20, 2017. Under revision. PDF

Abstract. International trade models typically consider countries exchanging goods/services, while urban models often examine the consequences of domestic trade for city structure. Relatively little known research synthesizes these features to allow for shocks propagating domestically with both domestic and international trade. One exception is Autor et al. (2013), who examine how Chinese imports impact US domestic labor markets.

We consider how city-to-city trade and city international exports impact city Gross Domestic Product (GDP) and housing price growth. We develop a theoretical model of trading cities, domestically and internationally, and explore its empirical predictions. We propose and estimate several empirical models. Using instrumental variables (IV), we identify city-level GDP growth impacts on city house price growth. This first equation follows from
imposing spatial equilibrium across cities. The second IV equation examines how international exports from a city, transfers, and domestic shipments impact city-level GDP. We also consider a third set of equations, which explores how economic integration, domestic and international, affects city-level GDP growth. In general, our empirical estimation results confirm the signs/magnitudes predicted by the theory, and imply that labor market shocks in trading cities affect city-level GDP, which in turn impacts housing prices. This theoretical approach, synthesis of city-level data, and empirical analysis are completely novel.



5. “On the Dynamics of Corruption.” With Costas Azariadis. June 25, 2020. Earlier version of paper with the same title, no. 9 above.PDF

Abstract. To examine the joint evolution of corruption and per capita GDP, we augment the standard lifecycle model of capital accumulation by three endogenous state variables that describe institutions and culture, and by three fixed parameters that proxy for personal morality and social interactions. Institutions that regulate economic incentives are decided by majority vote over a binary agenda that pits “strong” against `weak” property rights. Culture consists of slow changing social conventions which generate behavioral norms in the public and private sectors. Norms spread consumption externalities that impact the occupational opportunities of current households, and become in turn a reflection of past household choices. Our main theoretical finding is that societies with collectivist cultures and corruption-tolerant norms behave very differently from the individualistic ones of neoclassical growth theory. Collectivist society features include: (a) highly nonlinear GDP and corruption dynamics; (b) dominant roles for culture and social norms as engines of institutional quality, corruption and growth; and (c) majorities that favor diluted property rights, thus splitting the world economy into individualistic and collectivist convergence clubs with two distinct stable long-run states. These hypotheses receive a fair amount of support from international data.
Variations in social norms, culture and human capital typically explain more than half of the variance in per capita GDP across countries and time.
Many alternative measures of culture seem to be highly significant determinants of corruption and institutional quality. The fact that we control for culture in many alternative ways supports our confidence in the largely favorable tests of our main hypotheses.

JEL codes: F43, O11, O43, O47, D70, E71, Z10. Keywords: growth, institutions, corruption, social norms, culture, voting, social interactions.

4. “Vacancies in Housing and Labor Markets.” With Jeffrey E. Zabel. June 27, 2017. Under revision. PDF. The model of this paper is included in Ioannides and Zabel, “Housing and Labor Market Vacancies and Beveridge Curves: Theoretical Framework and Illustrative Statistics.” In: Ioannides, Yannis M., editor. Recent Developments in the Economics of Housing. Edward Elgar. 2019.  Vol. II. PDF on request.

Abstract. The Great Recession of 2007–2009 has prompted a focus on the link between the housing and business cycles. We model  the housing and labor markets by means of a DMP-type model that treats housing and labor supply as joint decisions and highlights the interdependence of vacancies in these markets. We estimate this  at the MSA level using data on housing vacancies from the US Census Bureau’s Housing Vacancy Survey (HVS) starting in 1986 and on job vacancies from the Conference Board’s Help-Wanted Index starting in 1951. In particular, we estimate a Beveridge Curvefor labor markets that includes spillovers from vacancies in the rental and homeownership housing markets, as well as  novel  Beveridge curves for owner and rental housing markets. We then estimate VAR models for housing and job vacancies. Results from impulse response functions show that shocks to rental  and  homeownership vacancies have negative and significant impacts on job vacancies.

3. “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.

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

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.