This paper introduces endogenous and directed technical change in a growth model with environ- mental constraints. A unique Önal good is produced by combining inputs from two sectors. One of these sectors uses ìdirtyîmachines and thus creates environmental degradation. Research can be directed to improving the technology of machines in either sector. We characterize dynamic tax policies that achieve sustainable growth or maximize intertemporal welfare. We show that: (i) in the case where the inputs are sufficiently substitutable, sustainable long-run growth can be achieved with temporary taxation of dirty innovation and production; (ii) optimal policy involves both "carbon taxes" and re- search subsidies, so that excessive use of carbon taxes is avoided; (iii) delay in intervention is costly: the sooner and the stronger is the policy response, the shorter is the slow growth transition phase; (iv) the use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire when the two inputs are substitutes. Under reasonable parameter values and with sufficient substitutability between inputs, it is optimal to redirect technical change towards clean technologies immediately and optimal environmental regulation need not reduce long-run growth.
We consider the robustness of extensive form mechanisms when common knowledge of the state of Nature is relaxed to common p-beliefs about it. We show that with even an arbitrarily small amount of such uncertainty, the Moore-Repullo mechanism does not yield (even approximately) truthful revelation and in addition there are sequential equilibria with undesirable outcomes. More generally, we show that any extensive form mechanism is fragile in the sense that if a non-monotonic social objective can be implemented with this mechanism, then there are arbitrarily small common p-belief value perturbations under which an undesirable sequential equilibrium exists.
This paper revisits the relationship between health and growth in light of modern endogenous growth theory. We propose an unified framework that encompasses the growth effects of both, the accumulation and the level of health. Based on cross-country regressions where we instrument for both variables, we find that a higher initial level and a higher rate of improvement in life expectancy, both have a significantly positive impact on per capita GDP growth. Then, restricting attention to OECD countries, we find supportive evidence that only the reduction in mortality below age forty generates productivity gains, which in turn may explain why the positive correlation relationship between health and growth in cross-OECD country regressions is weaker over the contemporary period.
Can a country grow faster by saving more? We address this question both theoretically and empirically. In our theoretical model, growth results from innovations that allow local sectors to catch up with frontier technology. In poor countries, catching up re- quires the cooperation of a foreign investor who is familiar with the frontier technology and a domestic entrepreneur who is familiar with local conditions. In such a country, domestic saving matters for innovation, and therefore growth, because it enables the local entrepreneur to put equity into this cooperative venture, which mitigates an agency problem that would otherwise deter the foreign investor from participating. In rich countries, domestic entrepreneurs are already familiar with frontier technology and therefore do not need to attract foreign investment to innovate, so domestic saving does not matter for growth. A cross-country regression shows that lagged savings is positively associated with productivity growth in poor countries but not in rich countries. The same result is found when the regression is run on data generated by a calibrated version of our theoretical model.
This paper evaluates whether the cyclical pattern of fiscal policy can affect growth. We first build a simple endogenous growth model where entrepreneurs can invest either in short-run projects or in long- term growth enhancing projects. Long-term projects involve a liquidity risk which credit constrained firms try to overcome by borrowing on the basis of their short-run profits. By increasing Örmsímarket size in recessions, a countercyclical fiscal policy will boost investment in productivity-enhancing long- term projects, and the more so in sectors that rely more on external Önancing or which display lower asset tangibility. Second, the paper tests this prediction using Rajan and Zingales (1998)'s diff-and-diff methodology on a panel data sample of manufacturing industries across 17 OECD countries over the period 1980-2005. The evidence confirms that the positive effects of a more countercyclical Öscal policy on value added growth, productivity growth, and R&D expenditure, are indeed larger in industries with heavier reliance on external Önance or lower asset tangibility.
We find that institutional ownership in publicly traded companies is associated with more innovation (measured as cited-weighted patents), even after controlling for a possible endogeneity of institutional ownership. To explore the mechanism through which this link arises, we build a model that nests managerial laziness with career-concern considerations, where institutional ownership increases the incentives managers have to innovate by reducing the career risk of innovative projects. While the lazy manager hypothesis predicts a substitution effect between institutional ownership and product market competition, the career-concern one allows for complementarity. Our finding that the effect of institutional investors on innovation increases with product market competition supports the career- concern model. This model is also supported by our finding that that CEOs are less likely to be fired in the face of profit downturns when institutional ownership is higher.