Charles I. Jones

Time Series Tests of Endogenous Growth Models

According to endogenous growth theory, permanent changes in certain policy variables have permanent effects on the rate of economic growth. Empirically, however, U. S. growth rates exhibit no large persistent changes. Therefore, the determinants of long-run growth highlighted by a specific growth model must similarly exhibit no large persistent changes, or the persistent movement in these variables must be offsetting. Otherwise, the growth model is inconsistent with time series evidence. This paper argues that many AK-style models and R&D-based models of endogenous growth are rejected by this criterion. The rejection of the R&D-based models is particularly strong.

Measuring the Social Return to R&D

Is there too much or too little research and development (R&D)? In this paper we bridge the gap between the recent growth literature and the empirical productivity literature. We derive in a growth model the relationship between the social rate of return to R&D and the coefficient estimates of the empirical literature and show that these estimates represent a lower bound. Furthermore, our analytic framework provides a direct mapping from the rate of return to the degree of underinvestment in research. Conservative estimates suggest that optimal R&D investment is at least two to four times actual investment.

Too Much of a Good Thing? The Economics of Investment in R&D"

Research and development is a key determinant of long-run productivity and welfare. A central issue is whether a decentralized economy undertakes too little or too much R&D. We develop an endogenous growth model that incorporates parametrically four important distortions to R&D: the surplus appropriability problem, knowledge spillovers, creative destruction, and duplication externalities. Calibrating the model, we find that the decentralized economy typically underinvests in R&D relative to what is socially optimal. The only exceptions to this conclusion occur when the duplication externality is strong and the equilibrium real interest rate is simultaneously high.

Productivity Across Industries and Countries: Time Series Theory and Evidence

The authors examine whether convergence in aggregate productivity is also occurring at the industry level in fourteen OECD countries from 1970 to 1987. Using both cross-section and time-series methods, they find convergence in some sectors, such as services. However, surprisingly, the authors find that convergence does not hold for the manufacturing sector. Decomposing aggregate convergence into industry productivity gains and changing sectoral shares of output, they find the service sector to be responsible for the bulk of cross-country convergence to the United States. The authors develop a new result on the asymptotic normality of panel unit root estimators to formally test within-sector convergence. Copyright 1996 by MIT Press.

Technology and Convergence

The empirical convergence literature envisages a world in which the presence or lack of convergence is a function of capital accumulation. This focus ignores a long tradition among economic historians and growth theorists which emphasizes technology and the potential for technology transfer. The authors suggest here that this neglect is an important oversight: simple models which incorporate technology transfer provide a richer framework for thinking about convergence. Empirically, differences in technologies across countries and sectors appear to match differences in labor productivity and to exhibit interesting changes over time. Copyright 1996 by Royal Economic Society.

Economic growth and the relative price of capital

This paper examines empirically the relationship between the relative price of capital and the rate of economic growth. In the results. machinery appears to bc the most important component of capital: when the relative price of machinery and the relative price of nonmachinery are included in a Barro ( 199 1) growth regression, a strong negative relationship between growth and the machinery price emerges while the nonmachinery price enters insignificantly. These results indicate that the tax treatment of machinery is an important policy instrument with respect to long-term growth and welfare. Kry \vords: Economic growth; Investment: Machinery investment; Price of capital

Population and Ideas: A Theory of Endogenous Growth

Why do economies exhibit sustained growth in per capita income? This paper argues that endogenous fertility and increasing returns to scale are the fundamental ingredients in understanding endogenous growth. Endogenous fertility leads the scale of the economy to grow over time. Increasing returns translates this increase in scale into rising per capita income. A justification for increasing returns rather than linearity in the equation for technological progress is the fundamental insight of the idea-based growth literature according to this view. Endogenous fertility together with the increasing returns associated with the nonrivalry of ideas generates endogenous growth.

Productivity and Convergence Across U.S. States and Industries

We examine the sources of aggregate labor productivity movements and convergence in the U.S. states from 1963 to 1989. Productivity levels vary widely across sectors and across states, as do sectoral output and employment shares. The main finding is the diverse performance of sectors regarding convergence. Using both cross-section and time series methods, we find convergence in labor productivity for both manufacturing and mining. However, we find that convergence does not hold for all sectors over the period. Decomposing aggregate convergence into industry productivity gains and changing sectoral shares of output, we find the manufacturing sector to be responsible for the bulk of cross-state convergence.

Misallocation, Economic Growth, and Input-Output Economics

One of the most important developments in the growth literature of the last decade is the enhanced appreciation of the role that the misallocation of resources plays in helping us understand income differences across countries. Misallocation at the micro level typically reduces total factor productivity at the macro level. Quantifying these effects is leading growth researchers in new directions, two examples being the extensive use of firm-level data and the exploration of input-output tables, and promises to yield new insights on why some countries are so much richer than others.

Human Capital, Ideas and Economic Growth

This chapter develops and analyses empirically a simple model of human capital, ideas and economic growth that integrates contributions from several different strands of the growth literature. These strands, and a discussion of what I try to emphasize in the paper, are outlined below: Romer (1990) and the research-based new growth theory. Recent advances in new growth theory emphasize the importance of ideas, non-rivalry and imperfect competition for understanding the engine of economic growth. Romer (1993) argues that these issues may also be important for understanding economic development. Nelson and Phelps (1966) provide a way of thinking about technology transfer that incorporates both human capital and advantages to ‘backwardness’. Mankiw et al. (1992) (MRW). MRW show that a simple neoclassical model can explain up to 80 per cent of the cross-country variation in the log of per capita GDP, especially if it incorporates differences in human capital investment across countries. Barro and Lee (1993) and Bits and Klenow (1996). Barro and Lee provide an extensive panel data set on educational attainment for a large number of countries. Bils and Klenow argue for including educational attainment in a model in a way that is consistent with Mincerian wage regressions. Benhabib and Spiegel (1994), Islam (1995), Pritchett (1996), and Judson (1996). These papers document in various ways a puzzle involving the relationship between human capital and economic growth. The puzzle appears when one looks at a growth-accounting approach that involves variables, such as the Barro and Lee (1993) human capital stocks. In either simple or multivariate regressions of the growth rate output on the growth rate of the human capital stock, the human capital stock appears with a negative coefficient.