Research Papers by Charles I. Jones




The Future of U.S. Economic Growth

(with John Fernald)
American Economic Review Papers and Proceedings 104(5): 44-49, May 2014


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What do modern growth theory and empirical evidence suggest about the future of U.S. economic growth? Rising educational attainment and research intensity reveal that up to 75% of growth during the last 50 years may have been due to transition dynamics. Moreover, because of the nonrivalry of ideas, long-run future growth in income per person is arguably tied to population growth, which seems to be slowing around the world. Both of these channels suggest substantially slower U.S. economic growth at some point in the future. Counterbalancing these concerns, at least for awhile, is the rise of China, India, and other emerging economies, which likely implies rapid growth in world researchers for at least the next several decades. Finally, and more speculatively, the shape of the idea production function introduces a fundamental uncertainty into the future of growth. For example, the possibility that artificial intelligence will allow machines to replace workers to some extent could lead to higher growth in the future.




The Allocation of Talent and U.S. Economic Growth

February 22, 2013 -- Version 3.0 (with Hsieh, Hurst, and Klenow)


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In 1960, 94 percent of doctors and lawyers were white men. By 2008, the fraction was just 62 percent. Similar changes in other highly-skilled occupations have occurred throughout the U.S. economy during the last fifty years. Given that innate talent for these professions is unlikely to differ across groups, the occupational distribution in 1960 suggests that a substantial pool of innately talented black men, black women, and white women were not pursuing their comparative advantage. This paper measures the macroeconomic consequences of the remarkable convergence in the occupational distribution between 1960 and 2008 through the prism of a Roy model. We find that 15 to 20 percent of growth in aggregate output per worker over this period may be explained by the improved allocation of talent.

History of Revisions:




Misallocation, Economic Growth, and Input-Output Economics

in D. Acemoglu, M. Arellano, and E. Dekel, Advances in Economics and Econometrics, Tenth World Congress, Volume II, Cambridge University Press, 2013

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One of the most important developments in the growth literature of the last decade is the enhanced appreciation of the role that the misallocation of resources plays in helping us understand income differences across countries. Misallocation at the micro level typically reduces total factor productivity at the macro level. Quantifying these effects is leading growth researchers in new directions, two examples being the extensive use of firm-level data and the exploration of input-output tables, and promises to yield new insights on why some countries are so much richer than others.

History of Revisions:




Beyond GDP?
Welfare across Countries and Time

February 16, 2011 -- Version 3.0 (with Pete Klenow)

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We propose a simple summary statistic for a nation's flow of welfare, measured as a consumption equivalent, and compute its level and growth rate for a broad set of countries. This welfare metric combines data on consumption, leisure, inequality, and mortality. Although it is highly correlated with per capita GDP, deviations are often economically significant: Western Europe looks considerably closer to U.S. living standards, emerging Asia has not caught up as much, and many African and Latin American countries appear farther behind. Each of the four components we introduce plays an important role in accounting for these differences.



History of Revisions:




The New Kaldor Facts:
Ideas, Institutions, Population, and Human Capital

June 17, 2009 -- Version 2.0 (with Paul Romer)
American Economic Journal: Macroeconomics, January 2010, Vol. 2 (1), pp. 224-245.

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AEJMacro-20090057-Replication.zip contains the matlab programs for generating all the graphs in the paper. After unzipping the file, please see README.txt for more information. tfpdata2000.txt contains the TFP data for 2000 used in Figure 4.

In 1961, Nicholas Kaldor used his list of six ``stylized'' facts both to summarize the patterns that economists had discovered in national income accounts and to shape the growth models that they were developing to explain them. Redoing this exercise today, nearly fifty years later, shows how much progress we have made. In contrast to Kaldor's facts, which revolved around a single state variable, physical capital, our six updated facts force consideration of four far more interesting variables: ideas, institutions, population, and human capital. Dynamic models have uncovered subtle interactions between these variables and generated important insights about such big questions as: Why has growth accelerated? Why are there gains from trade?

Prepared for a session at the January 2009 annual meeting of the American Economic Assocation on ``The secrets of growth: What have we learned from research in the last 25 years?''




Life and Growth

October 17, 2014 -- Version 4.0
Accepted subject to minor revisions, JPE

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Data: NSF-AllYears-IndustrialRND.xls | STAN-HealthRND.xls

Some technologies save lives --- new vaccines, new surgical techniques, safer highways. Others threaten lives --- pollution, nuclear accidents, global warming, the rapid global transmission of disease, and bioengineered viruses. How is growth theory altered when technologies involve life and death instead of just higher consumption? This paper shows that taking life into account has first-order consequences. Under standard preferences, the value of life may rise faster than consumption, leading society to value safety over consumption growth. As a result, the optimal rate of consumption growth may be substantially lower than what is feasible, in some cases falling all the way to zero.

History of Revisions:




Intermediate Goods and Weak Links in the Theory of Economic Development

American Economic Journal: Macroeconomics April 2011, Vol. 3 (2), pp. 1-28.

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Per capita income in the richest countries of the world exceeds that in the poorest countries by more than a factor of 50. What explains these enormous differences? This paper returns to two old ideas in development economics and proposes that linkages and complementarity are a key part of the explanation. First, linkages between firms through intermediate goods deliver a multiplier similar to the one associated with capital accumulation in a neoclassical growth model. Because the intermediate goods share of gross output is about 1/2, this multiplier is substantial. Second, just as a chain is only as strong as its weakest link, problems at any point in a production chain can reduce output substantially if inputs enter production in a complementary fashion. This paper builds a model to quantify these forces and shows that they substantially amplify distortions to the allocation of resources, bringing us closer to understanding large income differences across countries.

History of Revisions:




Insurance and Incentives for Medical Innovation

March 29, 2006 (with Alan Garber and Paul Romer)

Forum for Health Economics & Policy, 2006, Forum: Biomedical Research and the Economy: Article 4.

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This paper studies the interactions between health insurance and the incentives for innovation. Although we focus on pharmaceutical innovation, our discussion applies to other industries producing novel technologies for sale in markets with subsidized demand. Standard results in the growth and productivity literatures suggest that firms in many industries may possess inadequate incentives to innovate. Standard results in the health literature suggest that health insurance leads to the overutilization of health care. Our study of innovation in the pharmaceutical industry emphasizes the interaction of these incentives. Because of the large subsidies to demand from health insurance, limits on the lifetime of patents and possibly limits on monopoly pricing may be necessary to ensure that pharmaceutical companies do not possess excess incentives for innovation.




A New Proof of Uzawa's Steady-State Growth Theorem

March 29, 2007 -- Version 5.01 (with Dean Scrimgeour)
Review of Economics and Statistics, February 2008, Vol. 90 (1), pp. 180-182.

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This note revisits the proof of the Steady-State Growth Theorem, first given by Uzawa in 1961. We provide a clear statement of the theorem, discuss intuition for why it holds, and present a new, elegant proof due to Schlicht (2006).

History of Revisions:





The Value of Life and the Rise in Health Spending

(with Robert E. Hall)
Quarterly Journal of Economics, February 2007, Vol. 122 (1), pp. 39-72.

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Over the past half century, Americans spent a rising share of total economic resources on health and enjoyed substantially longer lives as a result. Debate on health policy often focuses on limiting the growth of health spending. We investigate an issue central to this debate: Is the growth of health spending a rational response to changing economic conditions---notably the growth of income per person? We develop a model based on standard economic assumptions and argue that this is indeed the case. Standard preferences---of the kind used widely in economics to study consumption, asset pricing, and labor supply---imply that health spending is a superior good with an income elasticity well above one. As people get richer and consumption rises, the marginal utility of consumption falls rapidly. Spending on health to extend life allows individuals to purchase additional periods of utility. The marginal utility of life extension does not decline. As a result, the optimal composition of total spending shifts toward health, and the health share grows along with income. In projections based on the quantitative analysis of our model, the optimal health share of spending seems likely to exceed 30 percent by the middle of the century.

History of Revisions:




The Shape of Production Functions and the Direction of Technical Change

Quarterly Journal of Economics, May 2005, Vol. 120 (2), pp. 517-549.

Download the paper in Acrobat PDF format. This paper largely replaces "Growth, Capital Shares, and a New Perspective on Production Functions," although the material on capital's share in that paper remains useful.

This paper views the standard production function in macroeconomics as a reduced form and derives its properties from microfoundations. The shape of this production function is governed by the distribution of ideas. If that distribution is Pareto, then two results obtain: the global production function is Cobb-Douglas, and technical change in the long run is labor-augmenting. Kortum (1997) showed that Pareto distributions are necessary if search-based idea models are to exhibit steady-state growth. Here we show that this same assumption delivers the additional results about the shape of the production function and the direction of technical change.




Growth, Capital Shares, and a New Perspective on Production Functions

June 12, 2003 -- Version 1.0

Download the paper in Acrobat PDF format. This paper has been replaced by "The Shape of Production Functions and the Direction of Technical Change" (see above). This paper may still be of interest because of its evidence on capital shares.

Standard growth theory implies that steady-state growth in the presence of exponential declines in the prices of computers and other capital equipment requires a Cobb-Douglas production function. Conventional wisdom holds that capital shares are relatively constant, so that the Cobb-Douglas approach might be a good way to model growth. Unfortunately, this conventional wisdom is misguided. Capital shares exhibit substantial trends and fluctuations in many countries and in many industries. Taken together, these facts represent a puzzle for growth theory. This paper resolves the puzzle by (a) presenting a production function that exhibits a short-run elasticity of substitution between capital and labor that is less than one and a long-run elasticity that is equal to one, and (b) providing microfoundations for why the production function might take the Cobb-Douglas form in the long run.




Growth and Ideas

in P. Aghion and S. Durlauf (eds.) Handbook of Economic Growth (Elsevier, 2005) Volume 1B, pp. 1063-1111.

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Web version with html links to many references (scroll down).

Ideas are different from nearly all other economic goods in that they are nonrivalrous. This nonrivalry implies that production possibilities are likely to be characterized by increasing returns to scale, an insight that has profound implications for economic growth. The purpose of this chapter is to explore these implications.




Why Have Health Expenditures as a Share of GDP Risen So Much?

May 5, 2004 -- Version 3.0

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As is well-known, aggregate health expenditures as a share of GDP have risen in the United States from about 5 percent in 1960 to nearly 15 percent in recent years. Why? This paper presents a model based on an explanation that has received increased attention in the last decade: technological progress. Medical advances allow diseases to be cured today, at a cost, that could not be cured at any price in the past. When this technological progress is combined with a Medicare-like transfer program to pay the health expenses of the elderly, the model is able to reproduce the basic facts of recent U.S. experience, including the large increase in the health expenditure share, a rise in life expectancy, and an increase in the size of health-related transfer payments as a share of GDP.




Was an Industrial Revolution Inevitable? Economic Growth Over the Very Long Run

Advances in Macroeconomics (2001) Volume 1, Number 2, Article 1.

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This paper studies a growth model that is able to match several key facts of economic history. For thousands of years, the average standard of living seems to have risen very little, despite increases in the level of technology and large increases in the level of the population. Then, after thousands of years of little change, the level of per capita consumption increased dramatically in less than two centuries. Quantitative analysis of the model highlights two factors central to understanding this history. The first is a virtuous circle: more people produce more ideas, which in turn makes additional population growth possible. The second is an improvement in institutions that promote innovation, such as property rights: the simulated economy indicates that arguably the single most important factor in the transition to modern growth has been the increase in the fraction of output paid to compensate inventors for the fruits of their labor.




Sources of U.S. Economic Growth in a World of Ideas

American Economic Review, March 2002, Vol. 92 (1), pp. 220-239.

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At least since 1950, the U.S. economy has benefited from increases in both educational attainment and research intensity. Such changes suggest, contrary to the conventional view, that the U.S. economy is far from its steady-state balanced growth path. This paper develops a model in which these facts are reconciled with the stability of average U.S. growth rates over the last century. In the model, long-run growth is driven by the worldwide discovery of new ideas, which in turn is tied to world population growth. Nevertheless, a constant growth path can temporarily be maintained at a rate greater than the long-run rate provided research intensity and educational attainment rise steadily over time. Growth accounting with this model reveals that 30 percent of U.S. growth between 1950 and 1993 is attributable to the rise in educational attainment, 50 percent is attributable to the rise in worldwide research intensity, and only about 10 to 20 percent is due to population growth in the idea-producing countries.

This is a substantially revised version of a previous paper, "The Upcoming Slowdown in U.S. Economic Growth."






Growth: With or Without Scale Effects?

American Economic Review Papers and Proceedings, May 1999, Vol. 89, pp.139-144.

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The property that ideas are nonrivalrous leads to a tight link between idea-based growth models and increasing returns to scale. In particular, changes in the size of an economy's population generally affect either the long-run growth rate or the long-run level of income in such models. This paper provides a partial review of the expanding literature on idea-based models and scale effects. It presents simple versions of various recent idea-based growth models and analyzes their implications for the relationship between scale and growth.




Population and Ideas: A Theory of Endogenous Growth

in Aghion, Frydman, Stiglitz, and Woodford (eds.) Knowledge, Information, and Expectations in Modern Macroeconomics: In Honor of Edmund S. Phelps (Princeton University Press) 2003.

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All models of sustained growth are linear in some sense, and the endogenous growth literature can be read as the search for the appropriate linear differential equation. Linearity is a ``crucial'' assumption, in the sense used by Solow (1956), and it therefore seems reasonable to ask that this assumption have an intuitive and compelling justification. This paper proposes that such a justification can be found if the linearity is located in an endogenous fertility equation. It is a fact of nature that the law of motion for population is linear: people reproduce in proportion to their number. By itself, this linearity will not generate per capita growth, but it is nevertheless the first key ingredient of such a model. The second key ingredient is increasing returns to scale. A justification for increasing returns, rather than linearity in the equation for technological progress, is the fundamental insight of the idea-based growth literature according to this view. Endogenous fertility together with increasing returns generates endogenous growth.




R&D-Based Models of Economic Growth

Journal of Political Economy, August 1995, Vol. 103, pp. 759-784.

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This paper argues that the "scale effects" prediction of many recent R&D-based models of growth is inconsistent with the times-series evidence from industrialized economies. A modified version of the Romer model that is consistent with this evidence is proposed, but the extended model alters a key implication usually found in endogenous growth theory. Although growth in the extended model is generated endogenously through R&D, the long-run growth rate depends only on parameters that are usually taken to be exogenous, including the rate of population growth.




Time Series Tests of Endogenous Growth Models

Quarterly Journal of Economics, May 1995, Vol. 110, pp. 495-525.

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According to endogenous growth theory, permanent changes in certain policy variables have permanent effects on the rate of economic growth. Empirically, however, U.S. growth rates exhibit no large persistent changes. Therefore, the determinants of long-run growth highlighted by a specific growth model must similarly exhibit no large persistent changes, or the persisten movement in these variables must be offsetting. Otherwise, the growth model is inconsistent with times series evidence. This paper argues that many AK-style models and R&D-based models of endogenous growth are rejected by this criterion. The rejection of the R&D-based models is particularly strong.




Why Do Some Countries Produce So Much More Output per Worker than Others?

Quarterly Journal of Economics, February 1999, Vol. 114, pp. 83-116 (with Robert E. Hall).

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Output per worker varies enormously across countries. Why? On an accounting basis, our analysis shows that differences in physical capital and educational attainment can only partially explain the variation in output per worker --- we find a large amount of variation in the level of the Solow residual across countries. At a deeper level, we document that the differences in capital accumulation, productivity, and therefore output per worker are driven by differences in institutions and government policies, which we call social infrastructure. We treat social infrastructure as endogenous, determined historically by location and other factors captured in part by language.

A previous version of this paper, with a different emphasis, was circulated under the title "The Productivity of Nations" (NBER Working Paper No. 5812). Version 3.0 of this paper also had a different title, "Fundamental Determinants of Output per Worker across Countries."




On the Evolution of the World Income Distribution

Journal of Economic Perspectives, Summer 1997, Vol. 11, pp. 19-36.

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The post-World War II period has seen substantial changes in the distribution of GDP per worker around the world. In the upper half of the distribution, a number of countries have exhibited large increases in income relative to the richest countries. In the bottom half, several countries have seen incomes fall relative to the richest countries. The net result of these changes is a movement in the shape of the world income distribution from something that looks like a normal distribution in 1960 to a bi-modal ``twin-peaks'' distribution in 1988. Projecting these changes into the future suggests a number of interesting findings. First, it seems likely that the U.S. will lose its position as the country with the highest level of GDP per worker. Second, growth miracles have been more common in recent decades than growth disasters. If these dynamics continue, the future income distribution will involve far more ``rich'' countries and far fewer ``poor'' countries than currently observed.




Convergence Revisited

Journal of Economic Growth, July 1997, Vol. 2, pp. 131-153.

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The recent literature on convergence has departed from the earlier literature by focusing on the shape of the production function and the rate at which an economy converges to its own steady state. This paper uses advances from the recent literature to look back at the question that originally motivated the convergence literature: what will the steady state distribution of per capita income look like? Several results are highlighted by the analysis. First, ignoring changes in technology levels over time, the long-run distribution is likely to be broadly similar to the 1990 distribution; the main exception is at the top of the distribution, where a number of NICs and industrialized countries continue to catch up to or even overtake the U.S. Second, differences in total factor productivity levels across economies are substantial---nearly the same magnitude as differences in per capita incomes. Third, TFP convergence would result in substantial changes in the income distribution. Finally, there is little reason to expect that the U.S. will maintain its position as world leader in terms of output per worker.




Levels of Economic Activity across Countries

American Economic Review Papers and Proceedings, May 1997, Vol. 87, pp.173-177 (with Robert E. Hall).

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This paper was prepared for the American Economic Association meetings in New Orleans, January 5, 1997, for a session organized by Andrew Warner on "What have we learned from recent empirical growth research?" The paper examines some of our recent work on levels of economic activity (instead of growth rates) across countries, and discusses how this work relates to empirical growth research.




Economic Growth and the Relative Price of Capital

Journal of Monetary Economics, December 1994, Vol. 34, pp. 359-382.

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This paper examines empirically the relationship between the relative price of capital and the rate of economic growth. In the results, machinery appears to be the most important component of capital: when the relative price of machinery and the relative price of nonmachinery are included in a Barro (1991) growth regression, a strong negative relationship between growth and the machinery price emerges while the nonmachinery price enters insignificantly. These results indicate that the tax treatment of machinery is an important policy instrument with respect to long-term growth and welfare.




Too Much of a Good Thing? The Economics of Investment in R&D

Journal of Economic Growth, March 2000, Vol. 5, No. 1, pp. 65-85 (with John Williams).

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Research and development (R&D) is a key determinant of long run productivity and welfare. A central issue is whether a decentralized economy undertakes too little or too much R&D. We develop an endogenous growth model that incorporates parametrically four important distortions to R&D: the surplus appropriability problem, knowledge spillovers, creative destruction, and duplication externalities. We show that our model is consistent with the available evidence on R&D, growth, and markups. Calibrating the model to micro and macro data, we find that the decentralized economy typically underinvests in R&D relative to what is socially optimal. The only exceptions to this conclusion occur when the duplication externality is strong and the equilibrium real interest rate is simultaneously high. These results are robust to reasonable variations in model parameters.




Measuring the Social Return to R&D

Quarterly Journal of Economics, November 1998, Vol. 113, pp. 1119-1135 (with John Williams).

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Is there too much or too little private research and development (R&D)? A large empirical literature reports estimates of the rate of return to R&D ranging from 30% to over 100%, supporting the notion that there is too little private investment in research. However, this conclusion is challenged by the new growth theory, which emphasizes a richer description of the connection between R&D and productivity. In this paper we bridge the gap between the theoretical and empirical literatures. Using the framework of an R&D-based growth model, we derive analytically the relationship between the social rate of return to R&D and the coefficient estimates of the empirical literature. Somewhat surprisingly, we show that these estimates represent a lower bound on the true social rate of return. Furthermore, our analytic framework provides a direct mapping from the rate of return to the degree of underinvestment in research. Using a conservative estimate of the rate of return to R&D of about 30%, optimal R&D investment is at least four times larger than actual investment.




Comparing Apples to Oranges: Reply

December 7, 2000 (with Andrew Bernard).

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This is a brief reply to an interesting comment by Anders Sorensen on Bernard and Jones (1996) "Comparing Apples to Oranges: Productivity Convergence and Measurement Across Industries and Countries" (AER 1996). Sorensen's comment, which is forthcoming in the AER, can be downloaded here.




Comparing Apples to Oranges: Productivity Convergence and Measurement Across Industries and Countries

American Economic Review, December 1996, Vol. 86, pp. 1216-1238 (with Andrew Bernard).

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This paper examines the role of sectors in aggregate convergence for 14 OECD countries from 1970-1987. The major finding is that manufacturing shows little evidence of either labor productivity or multifactor productivity convergence while other sectors, especially services, are driving the aggregate convergence result. To determine the robustness of the convergence results, the paper introduces a new measure of multi-factor productivity which avoids many problems inherent to traditional TFP measures when comparing productivity levels. The lack of convergence in manufacturing is robust to the method of calculating multi-factor productivity.




Technology and Convergence

Economic Journal, July 1996, Vol. 106, pp. 1037-1044 (with Andrew Bernard).

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The empirical convergence literature envisions a world in which the presence or lack of convergence is a function of capital accumulation. This focus ignores a long tradition among economic historians and growth theorists which emphasizes technology and the potential for technology transfer. We suggest here that this neglect is an important oversight: simple models which incorporate technology transfer provide a richer framework for thinking about convergence. Empirically, differences in technologies across countries and sectors appear to match differences in labor productivity and to exhibit interesting changes over time.




Productivity and Convergence across U.S. States and Industries

Empirical Economics, March 1996, Vol. 21, pp. 113-135 (with Andrew Bernard).

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We examine the sources of aggregate labor productivity movements and convergence in the U.S. states from 1963 to 1989. Productivity levels vary widely across sectors and across states, as do sectoral output and employment shares. The main finding is the diverse performance of sectors regarding convergence. Using both cross-section and time series methods, we find convergence in labor productivity for both manufacturing and mining. However, we find that convergence does not hold for all sectors over the period. Decomposing aggregate convergence into industry productivity gains and changing sectoral shares of output, we find the manufacturing sector to be responsible for the bulk of cross-state convergence.




A Note on the Closed-Form Solution of the Solow Model

Stanford mimeo, January 2000

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This brief note presents the closed-form solution of the Solow (1956) model when the production function is Cobb-Douglas.




Comment on Rodriguez-Rodrik, "Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence"

NBER Macroeconomics Annual 2000 (MIT Press).

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Comment on Klenow-Rodriguez, "The Neoclassical Growth Revival: Has it Gone too Far?"

NBER Macroeconomics Annual 1997 (MIT Press).

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Human Capital, Ideas, and Economic Growth

in Edmund S. Phelps (ed.) conference volume, forthcoming.

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This paper presents a simple model of human capital, ideas, and economic growth that integrates contributions from several different strands of the growth literature. The model generates a regression specification that is very similar to that employed by Mankiw, Romer, and Weil (1992), but the economics underlying the specification is very different. In particular, the model emphasizes the importance of ideas and technology transfer in addition to capital accumulation. The model suggests that cross-country data on educational attainment is most appropriately interpreted from the macro standpoint as something like an investment rate rather than as a capital stock. Finally, this setup helps to resolve a puzzle recently highlighted by the empirical growth literature concerning human capital and economic growth by following Bils and Klenow (1996) in emphasizing a relationship between wages and educational attainment that is consistent with Mincerian wage regressions.

Prepared for VIII Villa Mondragone International Economic Seminar in Rome on June 25-27, 1996.


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