Jose A. Scheinkman

Growth in Cities

Recent theories of economic growth, including those of Romer, Porter, and Jacobs, have stressed the role of technological spillovers in generating growth. Because such knowledge spillovers are particularly effective in cities, where communication between people is more extensive, data on the growth of industries in different cities allow us to test some of these theories. Using a new data set on the growth of large industries in 170 U.S. cities between 1956 and 1987, we find that local competition and urban variety, but not regional specialization, encourage employment growth in industries. The evidence suggests that important knowledge spillovers might occur between rather than within industries, consistent with the theories of Jacobs.

A test for independence based on the correlation dimension

This paper presents a test of independence that can be applied to the estimated residuals of any time series model that can be transformed into a model driven by independent and identically distributed errors. The first order asymptotic distribution of the test statistic is independent of estimation error provided that the parameters of the model under test can be estimated -consistently. Because of this, our method can be used as a model selection tool and as a specification test. Widely used software1 written by Dechert and LeBaron can be used to implement the test. Also, this software is fast enough that the null distribution of our test statistic can be estimated with bootstrap methods. Our method can be viewed as a nonlinear analog of the Box-Pierce Q statistic used in ARIMA analysis.

Crime and Social Interactions

The high degree of variance of crime rates across space (and across time) is one of the oldest puzzles in the social sciences (see Quetelet (1835)). Our empirical work strongly suggests that this variance is not the result of observed or unobserved geographic attributes. This paper presents a model where social interactions create enough covariance across individuals to explain the high cross- city variance of crime rates. This model provides a natural index of social interactions which can compare the degree of social interaction across crimes, across geographic 1units and across time. Our index gives similar results for different data samples and suggests that the amount of social interactions are highest in petty crimes (such as larceny and auto theft), moderate in more serious crimes (assault, burglary and robbery) and almost negligible in murder and rape. The index of social interactions is also applied to non-criminal choices and we find that there is substantial interaction in schooling choice.

The Social Multiplier

In many cases, aggregate data is used to make inferences about individual level behavior. If there are social interactions in which one persons actions influence his neighbors incentives or information, then these inferences are inappropriate. The presence of positive social interactions, or strategic complementarities, implies the existence of a social multiplier where aggregate relationships will overstate individual elasticities. We present a brief model and then estimate the size of the social multiplier in three areas: the impact of education on wages, the impact of demographics on crime and group membership among Dartmouth roommates. In all three areas there appears to be a significant social multiplier.

Back to the Future: Generating Moment Implications for Continuous-Time Markov Processes

Continuous-time Markov processes can be characterized conveniently by their infinitesimal generators. For such processes there exist forward and reverse-time generators. We show how to use these generators to construct moment conditions implied by stationary Markov processes. Generalized method of moments estimators and tests can be constructed using these moment conditions. The resulting econometric methods are designed to be applied to discrete-time data obtained by sampling continuous-time Markov processes.

The Relevance of the Two-Sector Production Model in Trade Theory

This paper examines how well the basic properties of the traditional 2 × 2 model of a competitive economy, commonly used in much of the pure theory of international trade, generalize when more goods and factors are considered. The notion of factor intensity and the Hekscher-Ohlin, Stolper-Samuelson, and Rybczynski theorems are discussed. The role played by the no-joint-production assumption as opposed to small dimensionality in the latter two results is stressed. The mathematical appendix provides a compact and formal statement of the properties discussed in the text.

The Informal Sector

This paper investigates the determinants of informal economic activity. We present two equilibrium models of informality and test their implications using a survey of 48,000+ small firms in Brazil. We define informality as tax avoidance; firms in the informal sector avoid tax payments but suffer other limitations. In the first model there is a single industry and informal firms face a higher cost of capital and a limitation on size. As a result informal firms are smaller and have a lower capital labor ratio. When education is an imperfect proxy for ability, we show that the interaction of the managers education and formality has a positive correlation with firm size. These implications are supported by our empirical analysis. The second model highlights the role of value added taxes in transmitting informality. It predicts that the informality of a firm is correlated to the informality of firms from which it buys or sells. The model implies that higher tolerance for informal firms in one production stage increases tax avoidance in downstream and upstream sectors. Empirical analysis shows that, in fact, various measures of formality of suppliers and purchasers (and its enforcement) are correlated with the formality of a firm. Even more interestingly, when we look at sectors where Brazilian firms are not subject to the credit system of value added tax, this chain effect vanishes.

Aggregate Fluctuations from Independent Sectoral Shocks: Self-Organized Criticality in a Model of Production and Inventory Dynamics

This paper illustrates how fluctuations in aggregate economic activity can result from many small, independent shocks to individual sectors. The effects of the small independent shocks fail to cancel in the aggregate due to the presence of two non-standard assumptions: local interaction between productive units (linked by supply relationships), and non-convex technology. We also argue that neither feature on its own would suffice. In the case of a simple model, we explicitly calculate the distribution of aggregate activity in the limit of an infinite number of independently disturbed sectors.

Price Setting Supergames with Capacity Constraints

This paper examines the role of industry capacity in enforcing collusion in the context of repeated games. For a fixed capacity per firm it is shown that changes in the number of firms have a non-monotone effect on the best enforceable cartel price. This is due to the fact that while an additional firm lowers the share that each of the other firms enjoys at the collusive price it also increases the losses to each firm should the cartel fail.

On optimal steady states of n-sector growth models when utility is discounted

Abstract This paper contains results on local and global stability of n-sector growth models when utility is discounted mostly for small rates of discount. It is well known that when future utility is not discounted one can prove precise results about optimal steady states (OSSs) under fairly general assumptions. In particular, existence, uniqueness, and turnpike properties have been established by several authors. The counter examples presented by Kurz, Sutherland, and Weitzman, however, show that when utility is discounted, additional assumptions are required to obtain turnpike results. In general, it would be interesting to know how the submanifolds of stability change as δ changes. One hopes that certain conditions on the utility function would be sufficient to “classify” the submanifolds of stability and instability. Such a question is apparently very difficult to answer, but we think that the results obtained here will help in this task. The proof that the turnpike theorem holds for discount factors near one is divided in two parts. First, we prove that optimal paths “visit” neighborhoods of the modified OSSs. Then, we prove that local stability holds for such neighborhoods. In order to show this fact, we must prove that the local “stable manifold” varies continuously with the discount factor. This roundabout method is necessary since our problem is similar to proving uniform continuity with respect to a parameter of solutions of a differential equation in a noncompact interval of time. Other problems analyzed here include uniqueness and continuity of OSSs. We also discuss the relation between the saddle-point property and the local stability of infinite horizon optimal growth paths.