Diego Restuccia

Intergenerational Persistence of Earnings: The Role of Early and College Education

Recent empirical studies show that the intergenerational persistence of economic status in the U.S. is much higher than previously thought. We develop a quantitative theory of inequality and intergenerational transmission of human capital where parents invest in early and college education of their children subject to borrowing constraints. Children differ exogenously in innate abilities, which can be correlated with their parents innate ability. An important feature of the environment is that the quality of early education determines the probability of college completion. We calibrate a stationary equilibrium of this economy to relevant statistics in aggregate U.S. data, and use it to investigate the sources of inequality and persistence in earnings. In our benchmark model, about half of the intergenerational persistence and one fourth of the inequality in earnings are accounted for by endogenous investments in education. We find that early investments in education account for most of the endogenous persistence in earnings, while college education generates most of the endogenous inequality in earnings. Our theory is suited to study the effect of educational policies on the persistence of inequality. We show that public resources devoted to early education have the largest impact on earnings mobility. Moreover, non-progressive college subsidies generate more intergenerational persistence of earnings.

Relative prices and investment rates

Abstract We construct a panel for the price of aggregate investment over consumption and report the following observations. (1) Relative price differences across countries are large over the entire sample period, and this conclusion is not affected by excluding non-tradable consumption goods. (2) Relative price dispersion has decreased during the sample period. (3) Relative price changes are not persistent across periods, while average price levels are. Moreover, the persistence in relative price levels is higher for countries at low relative prices. We show that the relative price of investment is negatively correlated with investment rates in a cross section of countries. The standard one-sector growth model is a natural framework to study quantitatively the effects of barriers to capital accumulation since there is a very simple mapping between barriers to investment and relative prices in this environment. We simulate a calibrated version of the model, in which barriers follow a stochastic process common to all countries and estimated using relative price data, and obtain statistics for investment rates that closely resemble what we observe in the data. In particular, the model accounts for 90% of the 1985 Gini index of relative investment rates and the decline in investment rate dispersion over time. The model has two limitations as a theory of development. First, it cannot account for the income disparity in the data unless we assume unmeasured capital with barriers affecting the broad measure of capital. Second, even under these extreme assumptions, the model cannot account for the evolution of income disparity over time.

A General Equilibrium Analysis of Parental Leave Policies

The programs used to solve for the equilibrium of the benchmark economy and the ones of the economies with mandatory leaves are written in fortran. The compiler used is Compact Visual Fortran Professional Edition 6.5.0.

Venezuela's Growth Experience

The standard of living, measured as gross domestic product (GDP) per capita, increased dramatically in Venezuela relative to that of the United States from 20 percent in 1920 to 90 percent in 1958, but since then has collapsed to around 30 percent nowadays. What explains these remarkable growth and collapse episodes? Using a standard development accounting framework, we show that the growth episode is mainly accounted for by an increase in capital accumulation and knowledge transfer associated with the foreign direct investment in the booming oil industry. The collapse episode is accounted for equally by a fall in total factor productivity and in capital accumulation. We analyze Venezuela during the collapse episode in the context of a model of heterogeneous production units were policies and institutions favour unproductive in detriment of more productive activities. These policies generate misallocation, lower TFP, and a decline in capital accumulation. We show in the context of an heterogeneous-establishment growth model that distortionary policies can explain a large portion of the current differences in TFP, capital accumulation, and income per capita between Venezuela and the United States.

On the Aggregate and Distributional Implications of Productivity Differences Across Countries

We develop a quantitative theory of human capital with heterogeneous agents in order to assess the sources of cross-country income differences. The cross-sectional implications of the theory and U.S. data are used to restrict the parameters of human capital technology. We then assess the models ability to explain the cross-country data. Our quantitative model generates a total-factor-productivity (TFP) elasticity of output per worker of 2.8. This implies that a factor of 3 difference in TFP is amplified through physical and human capital accumulation to generate a factor of 20 difference in output per worker --- as observed in the data between rich and poor countries. The implied difference in TFP is in the range of estimates from micro studies. The theory suggests that using Mincer returns to measure human capital understates human capital differences across countries by a factor of 2. The cross-country differences in human capital implied by the theory are consistent with evidence from earnings of immigrants in the United States. We also find that TFP has substantial effects on cross-sectional inequality and intergenerational mobility and that public education policies can have important aggregate and distributional implications.

Land Misallocation and Productivity

Using detailed household-level data from Malawi on physical quantities of outputs and inputs in agricultural production, we measure total factor productivity (TFP) for farms controlling for land quality, rain, and other transitory shocks. We find that operated land size and capital are essentially unrelated to farm TFP implying substantial factor misallocation. The aggregate agricultural output gain from a reallocation of factors to their efficient use among existing farmers is a factor of 3.6-fold. We directly link factor misallocation to severely restricted land markets as the vast majority of land is allocated by village chiefs and not marketed. In particular, the output gain from reallocation are 2.6 times larger for farms with no marketed land than for farms that only operate marketed land.

A Century of Human Capital and Hours

An average person born in the United States in the second half of the nineteenth century completed 7 years of schooling and spent 58 hours a week working in the market. By contrast, an average person born at the end of the twentieth century completed 14 years of schooling and spent 40 hours a week working. In the span of 100 years, completed years of schooling doubled and working hours decreased by 30 percent. What explains these trends? We consider a model of human capital and labor supply to quantitatively assess the contribution of exogenous variations in productivity (wage) and life expectancy in accounting for the secular trends in educational attainment and hours of work. We find that the observed increase in wages and life expectancy account for 80 percent of the increase in years of schooling and 88 percent of the reduction in hours of work. Rising wages alone account for 75 percent of the increase in schooling and almost all the decrease in hours in the model, whereas rising life expectancy alone accounts for 25 percent of the increase in schooling and almost none of the decrease in hours of work.

Financial Frictions and the Rule of Law

Using cross-country micro establishment-level data we document that crime and lack of access to finance are two major obstacles to business operation in poor and developing countries. Using an otherwise standard model of production heterogeneity that integrates institutional differences in the degree of financial development and the rule of law, we quantify the effects of these institutions on aggregate outcomes and economic development. The model accounts for the patterns across establishments in access to finance and crime as obstacles to their operation. Weaker financial development and rule of law have substantial negative effects on aggregate output, reducing output per capita by 50 percent. Weak rule-of-law institutions substantially amplify the negative impact of financial frictions. While financial markets are crucial for development, an essential precondition to reap the gains from financial liberalization is that property rights are secure.

On Average Establishment Size across Sectors and Countries

We construct a new dataset for the average employment size of establishments across sectors and countries from hundreds of sources. Establishments are larger in manufacturing than in services, and in each sector they are larger in richer countries. The cross-country income elasticity of establishment size is remarkably similar across sectors, about 0.3. We discuss these facts in light of several prominent theories of development such as entry costs and misallocation. We then quantify the sectoral and aggregate impact of entry costs and misallocation in an otherwise standard two-sector model with endogenous firm entry, firm-level productivity, and sectoral employment shares. We find that observed measures of misallocation account for the entire range of establishment-size differences across sectors and countries and almost 50 percent of the difference in non-agricultural GDP per capita between rich and poor countries.

Geography and Agricultural Productivity: Cross-Country Evidence from Micro Plot-Level Data

Why is agricultural productivity so low in poor countries relative to the rest of the world? Is it due to geography or constrained economic choices? We assess the quantitative role of geography and land quality for agricultural productivity differences across countries using high-resolution micro-geography data and a spatial accounting framework. Our rich spatial data provide in each cell of land covering the entire globe actual yields of cultivated crops and potential yields for 18 crops, which measure the maximum attainable output for each crop given soil quality, climate conditions, terrain topography, and a level of cultivation inputs. While there is considerable heterogeneity in land quality across space, even within narrow geographic regions, we find that low agricultural productivity in poor countries is not due to poor land endowments. If countries produced current crops in each cell according to potential yields, the rich-poor agricultural yield gap would virtually disappear, from more than 200 percent to less than 5 percent. We also find evidence of additional productivity gains attainable through the spatial reallocation of production and changes in crop choices.