Economic Growth Conference

February 4, 2010
Francisco Buera and James Feyrer, Organizers

Eric Hanushek, Stanford University and NBER, and Ludger Woessmann, University of Munich
Do Better Schools Lead to More Growth? Cognitive Skills, Economic Outcomes, and Causation

Hanushek and Woessmann investigate whether a causal interpretation of the robust association between cognitive skills and economic growth is appropriate and whether cross-country evidence supports a case for the economic benefits of effective school policy. They develop a new common metric that allows tracking student achievement across countries, over time, and along the within-country distribution. Extensive sensitivity analyses of cross-country growth regressions generate remarkably stable results across specifications, time periods, and country samples. In addressing causality, they find, first, significant growth effects of cognitive skills when instrumented by institutional features of school systems. Second, home-country cognitive-skill levels strongly affect the earnings of immigrants on the U.S. labor market in a difference-in-differences model that compares home-educated to U.S.-educated immigrants from the same country of origin. Third, countries that improved their cognitive skills over time experienced relative increases in their growth paths. From a policy perspective, the shares of basic literates and high performers have independent significant effects on growth, and the estimates suggest that the high-performer effect is larger in poorer countries.

Dietrich Vollrath, University of Houston
The Agricultural Basis of Comparative Development

Vollrath shows that long-run output per capita and industrialization depend upon the labor intensity of agricultural production. Because the diminishing returns to labor are less pronounced, a high labor elasticity in agriculture leads to a larger population density and lower output per capita, and a larger share of labor in agriculture. Development is slower when the labor intensity is high because increases in income are skewed towards higher population versus higher living standards. Historical evidence and cross-country estimates of agricultural production functions confirm that there is substantial variation in labor intensity across different crop types and climate zones. Consistent with relative development levels prior to the Industrial Revolution, regions in the tropics and/or with distinct dry seasons, as well as areas relying primarily on rice production, have labor-intense agricultural systems. Simulations show that small differences in agricultural labor intensity can have a significant impact on the timing of long-run development. These results suggest that the type of agriculture practiced can provide an important explanation for relative development levels in historical, and potentially in contemporary, contexts.

Jeremy Greenwood, University of Pennsylvania and NBER, Philipp Kircher, University of Pennsylvania, and Michele Tertilt, Stanford University and NBER
An Equilibrium Model of the African HIV/AIDS Epidemic

Greenwood, Kircher, and Tertilt present an equilibrium search model of the Malawian HIV/AIDS epidemic. Individuals engage in different types of sexual activity, which vary in their riskiness. When choosing a sexual activity, such as short-term sex without a condom, a person rationally considers its risk. A simulated version of the model is parameterized to match some salient facts about the Malawian epidemic. Some topical policies (for example, male circumcision, treatment of other STDs, and promoting marriage) are studied and found to have potential to backfire: moderate interventions may actually increase the prevalence of HIV/AIDS, because of shifts in human behavior and equilibrium effects.

Matthias Doepke, Northwestern University and NBER, and Andrea Eisfeldt, Northwestern University

In many developing countries, the institutional framework governing economic life has its roots in the colonial period, when the interests of European settlers clashed with those of the native population or imported slaves. Doepke and Esifeldt examine the economic implications of this conflict in a framework where institutions are represented by the number of people with property-rights protection, that is, "gun owners." In the model, gun owners can protect their own property, they can exploit others who do not own guns, and they may decide to extend property rights by handing out guns to previously unarmed people. The theory generates a "reversal of fortune" between colonies with many and few oppressed: income per capita is initially highest in colonies with many oppressed that can be exploited by gun owners, but later on excessive concentration of economic power becomes a hindrance for development.

Tasso Adamopoulos, York University, and Diego Restuccia, University of Toronto
The Size Distribution of Farms and International Productivity Differences

Using internationally comparable data from the World Agricultural Census, Adamopoulos and Restuccia document a factor of 36 difference in average farm size between rich and poor countries. Small farms of less than 2 hectares represent more than 70 percent of farms in poor countries but only 15 percent in rich countries, whereas large farms of more than 20 hectares represent none of the farms in poor countries and almost 40 percent in rich countries. Two questions emerge. First, what explains the striking differences in farm size across countries? Second, are farm-size differences important in understanding agricultural and aggregate productivity gaps across countries? The researchers develop a two-sector model with agriculture and non-agriculture featuring a non-degenerate size distribution of farms. The theory embeds a Lucas (1978) span-of-control model of farm size into a standard sectoral model with non-homothetic preferences. In the model calibrated to the United States, a reduction in economy-wide productivity from 1 to 1/4 produces an increase in the share of employment in agriculture from 2.5 percent to 53 percent, a 21-fold reduction in average farm size, and a 25-fold reduction in agricultural labor productivity. These results are broadly consistent with data on the sectoral allocation of labor and the size distribution of farms across countries.

Berthold Herrendorf, Arizona State University, Richard Rogerson, Arizona State University and NBER, and Akos Valentinyi, Magyar Nemzeti Bank
Two Perspectives on Preferences and Structural Transformation

Herrendorf, Rogerson, and Valentinyi ask what specification of preferences can account for the changes in the expenditure shares of broad sectors that are associated with the process of structural transformation in the United States since 1947. Following the tradition of the expenditure systems literature, they first calibrate utility function parameters using NIPA data on final consumption expenditure. They find that a Stone-Geary specification fits the data well. While useful, this exercise does not tell the researcher what utility function to use in a model that posits sectoral production functions in value added form. They therefore develop a method to calculate the value-added components of consumption categories that are consistent with value-added production functions, and they use these data to calibrate a utility function over sectoral consumption value added. They find that a Leontief specification fits the data well. Interestingly, the two specifications display very different properties: for final consumption, expenditure income effects are the dominant force behind changes in expenditure shares, whereas for consumption value-added, relative price effects are dominant.

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