Francesco Caselli

Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics

There are two sources of inconsistency in existing cross-country empirical work on growth: correlated individual effects and endogenous explanatory variables. We estimate a variety of cross-country growth regressions using a generalized method of moments estimator that eliminates both problems. In one application, we find that per capita incomes converge to their steady-state levels at a rate of approximately 10 percent per year. This result stands in sharp contrast to the current consensus, which places the convergence rate at 2 percent. We discuss the theoretical implications of this finding. In another application, we perform a test of the Solow model. Again, contrary to prior reults, we reject both the standard and the augmented version of the model.

The U.S. Structural Transformation and Regional Convergence: A Reinterpretation

We present a joint study of the U.S. structural transformation (the decline of agriculture as the dominating sector) and regional convergence (of southern to northern average wages). We find empirically that most of the regional convergence is attributable to the structural transformation: the nationwide convergence of agricultural wages to nonagricultural wages and the faster rate of transition of the southern labor force from agricultural to nonagricultural jobs. Similar results describe the Midwest’s catch‐up to the Northeast (but not the relative experience of the West). To explain these observations, we construct a model in which the South (Midwest) has a comparative advantage in producing unskilled labor–intensive agricultural goods. Thus it starts with a disproportionate share of the unskilled labor force and lower per capita incomes. Over time, declining education/training costs induce an increasing proportion of the labor force to move out of the (unskilled) agricultural sector and into the (skilled) nonagricultural sector. The decline in the agricultural labor force leads to an increase in relative agricultural wages. Both effects benefit the South (Midwest) disproportionately since it has more agricultural workers. With the addition of a less than unit income elasticity of demand for farm goods and faster technological progress in farming than outside of farming, this model successfully matches the quantitative features of the U.S. structural transformation and regional convergence, as well as several other stylized facts on U.S. economic growth in the last century. The model does not rely on frictions on interregional labor and capital mobility, since in our empirical work we find this channel to be less important than the compositional effects the model emphasizes.

ON THE THEORY OF ETHNIC CONFLICT

We present a theory of ethnic conflict in which coalitions formed along ethnic lines compete for the economy’s resources. The role of ethnicity is to enforce coalition membership: in ethnically homogeneous societies members of the losing coalition can defect to the winners at low cost, and this rules out conflict as an equilibrium outcome. We derive a number of implications of the model relating social, political, and economic indicators such as the incidence of conflict, the distance among ethnic groups, group sizes, income inequality, and expropriable resources.

Chapter 9 Accounting for Cross-Country Income Differences

Abstract Why are some countries so much richer than others? Development Accounting is a first-pass attempt at organizing the answer around two proximate determinants: factors of production and efficiency. It answers the question “how much of the cross-country income variance can be attributed to differences in (physical and human) capital, and how much to differences in the efficiency with which capital is used?” Hence, it does for the cross-section what growth accounting does in the time series. The current consensus is that efficiency is at least as important as capital in explaining income differences. I survey the data and the basic methods that lead to this consensus, and explore several extensions. I argue that some of these extensions may lead to a reconsideration of the evidence.

The Geography of Inter-State Resource Wars*

We establish a theoretical as well as empirical framework to assess the role of resource endowments and their geographic location for inter-State conflict. The main predictions of the theory are that conflict tends to be more likely when at least one country has natural resources; when the resources in the resource-endowed country are closer to the border; and, in the case where both countries have natural resources, when the resources are located asymmetrically vis-a-vis the border. We test these predictions on a novel dataset featuring oilfield distances from bilateral borders. The empirical analysis shows that the presence and location of oil are significant and quantitatively important predictors of inter-State conflicts after WW2.

The U.S. Technology Frontier

In Caselli and Coleman (2000) we developed a framework that separately identifies the efficiency units embodied in unskilled labor, skilled labor, and capital in a country’s aggregate production function. Applying that framework to cross-country data, we showed that countries where unskilled labor is relatively abundant are those with the most efficient unskilled workers, while countries where skilled labor and capital are abundant are the most efficient users of these inputs. We interpreted these findings as evidence of appropriatetechnology adoption: in each country firms choose from a menu of technologies; different technologies imply different combinations of values for the efficiency units embodied in the three factors of production; in each country the technology is chosen that makes the most of the most abundant factors. In this paper we apply the same framework to time-series data from the United States over the period 1963–1992. We find that throughout this period the efficiencies of skilled labor and capital have risen. The efficiency of unskilled labor has risen in tandem with those of the other factors in the early part of the sample, but surprisingly, it has been falling since sometime in the 1970’s (the exact turning point depends somewhat on some parametric assumptions). In analogy with the cross-country evidence, these changes are closely associated with changes in the relative abundance of skilled labor and capital, which increased rather dramatically. In this sense, the recent history of technologies in use by U.S. firms may mimic the choice of technologies around the world today: as skills and capital become more abundant, technologies are chosen that maximize the efficiency of these inputs. As we discuss below, however, in the U.S. context the converse story (relative labor supplies adjusting to exogenous changes in technology) is also consistent with the data. Besides its relevance to models of technology adoption, this evidence also sheds new light on the widely documented recent increase in the skilled wage premium in the United States. Lawrence F. Katz and Kevin M. Murphy (1992) and David H. Autor et al. (1998) used the relative wage and the relative labor supply series to show that the efficiency of unskilled labor relative to skilled labor must have declined over time. Our framework allows us to go further and show that, indeed, the absolute efficiency of unskilled labor has fallen (after 1970), while the efficiency of skilled labor and capital have increased. A similar result was obtained with different techniques by Marta Ruiz Arranz (2001).

The Political Economy of the Greek Debt Crisis: A Tale of Two Bailouts

We review the events that led to the May 2010 and July 2011 bailout agreements. We interpret the bailouts as outcomes of political-economy equilibria. We argue that the second bailout was not on the Pareto frontier and sketch political-economy arguments for why this may be so.

On the distribution of debt and taxes

Abstract This paper studies public-debt runs under alternative assumptions on the distribution of taxes among tax bases, the distribution of debt among classes of taxpayers, and the distributive preferences of the govenment. Asymmetries in the distribution of taxes— arising, for example, from income-tax evasion by some categories of taxpayers—increase the likelihood of a confidence crisis on the public debt. On the other hand, perhaps surprisingly, the probability of a run followed by default is decreasing in the degree of identification of the government with a specific constituency, whereas it is a maximum when the policymaker is a coalition where all social groups are represented equally. Empirical evidence from a sample of high-debt OECD countries is found to be broadly consistent with the theoretical results: regression results indicate that ‘coalition premia’ and ‘tax-imbalance premia’ appear to contribute to the interest cost of the public debt.

The Incumbency Effects of Signalling

Much literature on political behaviour treats politicians as motivated by re-election, choosing actions to signal their types to voters. We identify a novel implication of incumbent signalling. Because incumbents only care about clearing a re-election hurdle, signals will tend to cluster just above the threshold needed for re-election. This generates a skew distribution of signals leading to an incumbency advantage in the probability of election. We also solve for the optimal threshold when voters have the ability to commit.

Rural labor and credit markets

This paper studies changes over time in the incidence of labor tying. The existing literature is successful in explaining the emergence of this institution, but contains the counterfactual implication that there should be an increasing trend in labor tying. However, previous contributions have so far implicitly assumed that there are no consumption-credit markets available to workers. I show that taking account of borrowing opportunities leads to new predictions about the evolution of permanent labor. In particular, declines in borrowing costs associated to efficiency gains in the financial sector lead to a fall in the fraction of rural workers who are tied. In addition, if consumption-credit markets are operating, a fall in the size of the rural population will cause, under certain conditions, a decline in the percentage of permanent workers. These predictions are consistent with the observed trends in developing countries. Hence, this paper complements previous theoretical work on labor tying: with its addition, the theory now explains the emergence, persistence and final demise of this institution.