Douglas Holtz-Eakin

Estimating Vector Autoregressions with Panel Data

This paper considers estimation and testing of vector autoregressio n coefficients in panel data, and applies the techniques to analyze the dynamic relationships between wages an d hours worked in two samples of American males. The model allows for nonstationary individual effects and is estimated by applying instrumental variables to the quasi-differenced autoregressive equations. The empirical results suggest the absence of lagged hours in the wage forecasting equation. The results also show that lagged hours is important in the hours equation. Copyright 1988 by The Econometric Society.

Sticking it Out: Entrepreneurial Survival and Liquidity Constraints

We examine why some individuals survive as entrepreneurs and others do not. In addition, we analyze the growth of entrepreneurial enterprises, conditional on surviving. Our focus is on the role of access to capital: To what extent do liquidity constraints increase the likelihood of entrepreneurial failure? The empirical strategy is based on the following logic: If entrepreneurs cannot borrow to attain their profit-maximizing levels of capital, then those entrepreneurs who have substantial personal financial resources will be more successful than those who do not. The data consist of the 1981 and 1985 federal individual income tax returns of a group of people who received inheritances. These data allow us to identify those individuals who were sole proprietors in 1981 and to determine the extent to which the decision to remain a sole proprietor was influenced by the magnitude of the inheritance-induced increase in liquidity. The results are consistent with the notion that liquidity constraints exert a noticeable influence on the viability of entrepreneurial enterprises. For example, a

Stoking the Fires? Co2 Emissions and Economic Growth

150,000 inheritance increases the probability than an individual will continue as a sole proprietor by 1.3 percentage points, and if the enterprise survives, it receipts increase by almost 20 percent.

Entrepreneurial Decisions and Liquidity Constraints

Over the past decade, concern over potential global warming has focused attention on the emission of greenhouse gases into the atmosphere, and there is an active debate concerning the desirability of reducing emissions. At the heart of this debate is the future path of both greenhouse gas emissions and economic development among the nations. We use global panel data to estimate the relationship between per capita income and carbon dioxide emissions, and then use the estimated trajectories to forecast global emissions of CO2. The analysis yields four major results. First, the evidence suggests a diminishing marginal propensity to emit (MPE) CO2 as economies develop; a result masked in analyses that rely on cross-section data alone. Second, despite the diminishing MPE, our forecasts indicate that global emissions of CO2 will continue to grow at an annual rate of 1.8 percent. Third, continued growth stems from the fact that economic and population growth will be most rapid in the lower-income nations that have the highest MPE. For this reason, there will be an inevitable tension between policies to control greenhouse gas emissions and those toward the global distribution of income. Finally, our sensitivity analyses suggest that the pace of economic development does not dramatically alter the future annual or cumulative flow of CO2 emissions.

Infrastructure in a structural model of economic growth

This paper analyzes the role of liquidity constraints in the formation of new entrepreneurial enterprises. The basic empirical strategy is to determine whether an individuals wealth affects the probability of becoming an entrepreneur, and the conditional amounts of depreciable assets, ceteris paribus. If so, liquidity constraints are likely to be present. To be successful, such a research strategy requires a measure of asset variation that is both precisely measured and exogenous to the entrepreneurial decision. Our data are uniquely well-suited for this purpose. The sample consists of the 1981 and 1985 federal income tax returns of a group of people who received inheritances in 1982 and 1983, along with information on the size of those inheritances from a matched set of estate tax returns. Hence, we can examine how the exogenous receipt of capital affects the decision to become an entrepreneur and important financial characteristics of new enterprises. Our results suggest that the size of the inheritance has a substantial effect on the probability of becoming an entrepreneur, and that conditional on becoming an entrepreneur, the size of the inheritance has a statistically significant and quantitatively important effect on the amount of capital employed. These findings are consistent with the presence of liquidity constraints.

Scale Economies, Returns to Variety, and the Productivity of Public Infrastructure

This paper develops a neoclassical growth model that explicitly incorporates infrastructure and is designed to provide a tractable framework within which to analyze the empirical importance of public capital accumulation to productivity growth. The authors find little support for claims of a dramatic productivity boost from increased infrastructure outlays. In a specification designed to provide an upper bound for the influence of infrastructure, the authors estimate that raising the rate of infrastructure investment would have had a negligible impact on annual productivity growth between 1971 and 1986.

The Revenues-Expenditures Nexus: Evidence from Local Government Data

We examine the productivity of public infrastructure in a general equilibrium context. In our model, infrastructure lowers costs in a manufacturing sector characterized by both firm-level returns to scale and industry-level external returns to variety. Infrastructure alters factor prices, intermediate prices and the allocation of factors across sectors. The effect on manufacturing or aggregate output, however, is indeterminate. In particular, our theory suggests that the degree of monopoly power influences public capitals productivity effect. We test the model using state-level panel data. We confirm the absence of direct effects on output, but find suggestive evidence of a positive impact of public capital on manufacturing variety as measured by the number of manufacturing establishments. These results indicate the need for future research on potentially important indirect channels by which public capital affects manufacturing productivity.

Health insurance and the supply of entrepreneurs

This paper examines the intertemporal linkages between local government expenditures and revenues. In the terminology that has become standard in the literature on vector autoregression analysis, the issue is whether revenues Granger-cause expenditures, or expenditures Granger-cause revenues. The main results that emerge from an analysis of fiscal data from 171 municipal governments over the period 1972-1980 are that: 1) one or two years are sufficient to summarize the relevant dynamic interrelationships; 2) there are important intertemporal linkages between expenditures, taxes and grants; and 3) past revenues help predict current expenditures, but past expenditures do not alter the future path of revenues. This last finding is contrary to results that have emerged from previous analyses of federal fiscal data, and hence suggests the need for additional research on the differences in the processes generating local and federal decisions.

State-specific estimates of state and local government capital

Some commentators have suggested that the absence of portable health insurance impedes people from leaving their jobs to start new firms. We investigate this belief by comparing wage-earners who become self-employed during a given period of time with their counterparts who do not. By examining the impact of variables relating to the health insurance and health status of these workers and their families, we can infer whether the lack of health insurance portability affects the probability that they become self-employed. The evidence does not support the conjecture that the current health insurance system affects the propensity to become self-employed. Hence, whatever its other merits, there is no reason to believe that the introduction of universal health insurance would significantly enhance entrepreneurial activity.

Productivity and wage effects of “family‐friendly” fringe benefits

Abstract I present estimates of capital accumulation by state and local governments in each state between 1960 and 1988, based on information from the Bureau of the Census and the Bureau of Economic Analysis. Such estimates are useful for many research purposes. Munnell (1990a) also estimates state and local government capital using similar sources, but exploits the data in a different manner. In the method employed by Munnell, the capital stock in a state is sensitive to relative rates of capital accumulation among all states. In practice, the approach used herein results in larger public sector capital stocks in higher-population states.