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Empirical evidence suggests a positive correlation between health and educational outcomes at the aggregate level. However, both inter and intra-country data suggest that these variables may not always be monotonically increasing in income, pointing towards household income as a possible mitigating factor in the relationship between health and education expenditures and outcomes. We develop an overlapping generations model where agents spend their childhood studying, undertake expenditures to educate their offspring and health expenditures to improve their own longevity in adult age, and spend old age in retirement. Our model is characterised by two equilibria. In one equilibrium, longevity enhancing health expenditure is an inferior good, resulting in agents substituting health expenditures in favour of education expenditures on offspring as their income increases. In the other equilibrium, health expenditure is a normal good, but for incomes below a certain level, an increase in income causes agents to raise health expenditures whilst lowering education expenditures on offspring, while for incomes above this level all expenditures are increasing in income. These results suggest that the relationship between parental longevity and offspring’s human capital depends on income and whether agents consider longevity enhancing health expenditure to be an inferior or normal good. Dynamics of the model show that the economy could either achieve unbounded growth or converge towards a lower bound of income in the long run.

We examine the impact of a comprehensive set of measures of human capital on recently created, direct measures of technology adoption using country-level panel data for the period 1964–2003, covering a wide range of technologies in various sectors of the economy. We consider many dimensions of human capital, using both qualitative and quantitative measures, as well as indirect measures that capture the role of “learning by doing” intrinsic to the process of technological diffusion. Our analysis, which examines the human capital and technological diffusion link more comprehensively relative to previous studies, suggests that the link is a conditional one, resting on various aspects of human capital and the nature of the technology in question. Overall, the results suggest that the type of human capital that is formed via the learning-by-doing mechanism may be the most important determinant of technological diffusion, followed by, to a substantially less degree, qualitative determinants such as cognitive skills (measured using test scores) and quantitative or other measures (such as years of schooling and life expectancy). Our conclusions are robust to the inclusion of institutional variables and other factors that determine technological diffusion.

PurposeThe purpose of this paper is to explore the manner in which the degree of substitutability between public and private health expenditures contributes towards the distribution of wealth and political economy outcomes in the long run.Design/methodology/approachAn overlapping generations model with heterogeneous agents where a person’s probability of survival into old age is determined by a variable elasticity of substitution (VES) health production function with public and private expenditures as inputs is developed. Public expenditure on health is determined through a political economy process.FindingsAnalytical and numerical results reveal that higher substitutability between private and public expenditures at the aggregate level and a higher share of public spending in the production of health lead to higher long run wealth levels and lower inequality. In the political equilibrium, higher aggregate substitutability between public and private health expenditures is associated with more tax revenue allocated towards public health. For most parameter combinations, the political economy and welfare maximising proportions of tax revenue allocated towards public health care converge in the long run.Research limitations/implicationsThe paper is a theoretical investigation of how substitutability between public and private health expenditures affect transitional and long run macroeconomic outcomes. These results are amenable to further empirical investigation.Practical implicationsThe findings indicate that policies to improve institutional aspects that yield higher substitutability between public and private health expenditures and returns to public health spending could lead to better long run economic outcomes.Social implicationsThe results provide a political economy explanation for the low investments in public health care in developing countries, where aggregate substitutability between public and private health expenditures is likely to be lower. Furthermore, comparing the political economy and welfare maximising paradigms broadens the scope of the framework developed herein to provide potential explanations for cross-country differences in health outcomes.Originality/valueThis paper adopts an innovative approach to exploring this issue of substitutability in health expenditures by introducing a VES health production function. In an environment where agents have heterogeneous wealth endowments, this specification enables a distinction to be made between substitutability of these expenditures at the aggregate and individual levels, which introduces a rich set of dynamics that feeds into long run outcomes and political economy results.

This paper investigates the commodity price shocks and monetary shocks in the region covered by the North American Free Trade Agreement (NAFTA), using a global vector autoregression (GVAR) approach. Our focus is on commodity price shocks which impact both directly through the aggregate price level, as well as through monetary policy related aggregates such as short-term interest rates.We first contrast the response of the real economy to commodity price shocks in two periods: 1983Q2–2015Q2 and 1994Q1–2015Q2, where the beginning of the second sample coincides with a statistically identified structural break, as well as the introduction of NAFTA. The results indicate that the commodity price shocks, such as for oil and metal, have a bigger impact on the real economy after NAFTA came into force,withmetal prices having a larger quantitative impact on output in comparison to oil prices. Next,we investigatewhether these changes have different implications for the impact of domestic monetary shocks in the three countries. We find that while the post-NAFTA period is characterized by a stronger domestic monetary policy response to commodity price shocks, the response to monetary shocks per se varies in the two time periods. In particular U.S. monetary policy, as reflected in shocks to short-term interest rates, has a weaker influence in the post-NAFTA period. Overall, the influence of global, commodity price shocks in the region relative to domestic monetary shocks is greater in the post-NAFTA period.

We develop an overlapping generations model to examine how public and private education expenditures impacts on an economy's long run outcomes. Young agents' education is “produced” according to a variable elasticity of substitution production function where the inputs are public education and private expenditures undertaken by parents. Results reveal that higher substitutability between these inputs enables agents to reduce private education expenditures and spend more on consumption and investment, leading to better economic outcomes. Higher aggregate substitutability therefore also implies that a higher tax rate is optimal, since this reduces the need for private educational expenditures to supplement public education expenditures. Analytical results reveal that, depending on initial conditions, the economy could either achieve smooth convergence towards the long run outcome or experience fluctuations during transition. However, numerical analysis suggests that a smooth transition is more likely. Fluctuations during transition may occur when the share of parental human capital in determining an agent's human capital is high. Hence, institutional reforms that reduce the importance of inherited human capital by providing everyone better access to high quality education could facilitate smooth convergence to the long run outcome.

We revisit the notion of “appropriate technology” considered in Basu and Weil (1998) whereby technologies that are more capital intensive are adopted only after a certain level of capital depth has been achieved. We incorporate the idea by explicitly modelling the choice between two technologies in a heterogeneous agent model with overlapping generations. Both technologies can be improved through ‘learning-by-doing’ and adaptation of the technology to local conditions. One of the technologies is an ‘advanced technology’ in that it has potentially greater returns to capital deepening, and also to learning-by-doing and adaptation. However, a critical level of development has to be reached before the technology becomes appropriate; for lower levels of development the less advanced technology is more productive. Depending on initial conditions, a variety of long run outcomes and transitional dynamics are possible, suggesting that “appropriate technology” provides a potential explanation for the diversity of growth and technology diffusion experiences observed in world economies.

We examine the impact of financial reforms on efficient reallocation of capital within and between sectors in South Africa using firm-level panel data for the period 1991–2008. The measure of efficient allocation of capital is based on the Tobin’s Q. We find that financial reforms are associated with improvements in within-sector, but not between-sector allocation of capital. These results imply that for South Africa to unleash the potential for take-off that is often associated with reallocation of resources from the primitive to modern sectors, reforms that focus beyond the financial sector are necessary. While more research is necessary to determine what would fully constitute such additional reforms, our analysis shows that reforms that improve the quality of economic institutions may be a step in the right the direction.

We study a political economy model which aims to understand the diversity in the growth and technology-adoption experiences in different economies. In this model the cost of technology adoption is endogenous and varies across heterogeneous agents. Agents in the model vote on the proportion of revenues allocated towards such expenditures. In the early stages of development, the political-economy outcome of the model ensures that a sub-optimal proportion of government revenue is used to finance adoption-cost reducing expenditures. This sub-optimality is due to the presence of inequality; agents at the lower end of the distribution favor a larger amount of revenue allocated towards redistribution in the form of lump-sum transfers. Eventually all individuals make the switch to the better technology and their incomes converge. The outcomes of the model therefore explain why public choice is more likely to be conservative in nature; it represents the majority choice given conflicting preferences among agents. Consequently, the transition path towards growth and technology adoption varies across countries depending on initial levels of inequality.

The stylized facts that motivate this article include the diversity in growth patterns that are observed across countries during the process of economic development and the divergence over time in income distributions both within and across countries. We construct a dynamic general equilibrium model in which technology adoption is costly and agents are heterogeneous in their initial holdings of resources. We interpret the adoption cost as the resources expended in acquiring skills associated with new technologies. Endogenous growth occurs in our model largely as a result of human capital deepening. The analytical results of the model characterize three growth outcomes associated with the technology adoption process depending on productivity differences between the technologies. These outcomes are labeled ‘poverty trap,’ ‘dual economy,’ and ‘balanced growth.’ The model is then capable of explaining the observed diversity in growth patterns in addition to the divergence of incomes over time and across countries.

In this paper we examine the dynamics of the link between inequality and inflation from a political economy perspective. We consider a simple dynamic general equilibrium model in which agents vote over the desired inflation rate in each period, and inequality is persistent. Inflation in our model is a mechanism of redistribution, and we find that the link between inequality and inflation within any period or over time depends on institutional and preference related parameters. Furthermore, we find that differences in the initial distributions of wealth can yield a diverse set of patterns for the evolution of the inflation and inequality link. Relative to existing literature, our model leads to more precise predictions about the inflation–inequality correlation. To that end, results in the extant empirical literature on the inflation and inequality link need to be interpreted with caution.

PurposeThe purpose of this paper is to explore the properties of the variable elasticity of substitution (VES) production function, and examine the dynamics of growth associated with it.Design/methodology/approachThe VES production function is incorporated into an otherwise standard Diamond overlapping generations model.FindingsDepending on parameter combinations, the economy can achieve a unique and stable steady state akin to that observed in the Solow-Swan model, reach a poverty trap or transition towards an upper bound of per capita capital stock. A special case of the VES production function is also consistent with unbounded growth.Research limitations/implicationsThe paper is theoretical in nature. Further empirical analysis could shed deeper insights into the results presented in this study.Practical implicationsThe VES production function, when applied to the context of the Diamond model, can capture a variety of growth experiences observed in the empirical literature.Social implicationsIn the context of the Diamond model, a higher value of a particular parameter in the production function leads to greater intergenerational income and consumption inequality. Hence, the study provides a potential explanation for intergenerational inequalities observed in practice.Originality/valueThe study demonstrates the empirical value of the VES production function in explaining observed differences in factor shares, rewards and elasticities within and between countries over time.

We examine technology adoption and growth in a political economy framework where two alternative mechanisms of redistribution are on the menu of choice for the economy. One of these is a lump-sum transfer given to agents in the economy. The other is in the form of expenditure directed towards institutional reform aimed at bringing about a reduction in the cost of technology adoption in the presence of uncertainty. The choice over these mechanisms is examined under three alternative approaches to collective decision making. In the first setting, voting takes place to determine the proportion of revenue allocated to adoption-cost-reducing institutional expenditure. In the second setting, the government chooses this proportion to maximize a ‘Benthamite’ social welfare function, i.e. the sum of utilities of agents in the economy. The third setting applies the Rawlsian social welfare function, which is the most “egalitarian” in that this proportion is chosen to maximize the minimum level of utility attained in the heterogeneous agent economy. We find that the extent of uncertainty, working through the political economy mechanism, has a positive impact on long run average wealth levels in the economy in all settings. The voting mechanism leads to the fastest transition to sustained balanced growth in all cases, while the slowest transition is experienced in the case of the Rawlsian economy. Expenditures on institutional development are higher in the voting and Benthamite economies relative to the Rawlsian economy. All economies converge to the same inequality and growth rates in the long run. Transitional inequality, however, is highest in the Rawlsian framework.

When the acronym of eBRICi was coined in 2001 by Jim OiNeill of Goldman Sachs, it was expected that economic growth rates in India, Brazil and Russia would eventually catch up with that of China. However, China has continued to outperform the other economies in the group, even after it was renamed eBRICSi to reflect the inclusion of South Africa in 2010. The focus of this chapter is on one of the BRICS economies, namely India. Its aim is to examine from an economic perspective, why Indiais performance has not lived up to expectations, and comment on the key challenges it faces in meeting them. We begin with some descriptive statistics regarding the progress of the Indian economy since 1990. While it has been growing at a rapid rate since the reforms it introduced in the1990s, there has been a slowdown in its overall GDP growth rates since 2008. The rate of growth experienced in the period 2003n07 was an average of 10.5 per cent. However, since the recession following the Global Financial Crisis (GFC) of 2008, the growth rate has fallen. From the period 2008n12 it has only registered an average growth rate of 6.5 per cent (World Bank, 2013). This chapter suggests that one of the major factors underpinning this slowdown is the performance of Indiais agricultural sector. The importance of the agricultural sector is highlighted by the following stylized facts.

We develop an overlapping generations model to explore how the degree of aggregate substitutability between public and parental education expenditures impacts long run macroeconomic outcomes. Using a variable elasticity of substitution “education production function,” in which public and education expenditures are the inputs, we observe that greater aggregate substitutability between these two types of expenditure yields better long run macroeconomic outcomes and that the proportion of tax revenue allocated towards public education is increasing in aggregate substitutability. Analysis of the stability of the steady state reveals that, depending on the values of the parameters of the model, the economy could reach a stable steady state or achieve unbounded growth. We suggest that policies aimed at improving aggregate substitutability between public and private education outcomes could contribute towards improved long run outcomes.

Aggregate data are used to study determinants of income tax revenues and taxpayer compliance in India during 1965–1966 to 1992–1993. The estimates show that both revenues collected and compliance were significantly affected by tax structure (marginal tax rates and exemption limit). In addition, inflation as well as declining assessment intensity had a significant negative effect, while traditional enforcement tools (searches, penalties and prosecution activity) had only a limited effect. “Best practice” enforcement, assessment and tax structure policies could have yielded at most a 90% revenue increase, leaving India's income tax performance below the average of countries with similar GDP per capita. Thorough reform of tax administration is therefore needed to raise income tax collection in India to international standards.

This paper revisits the original Allingham and Sandmo (1972) framework with a view towards addressing the issue of tax compliance, and examining the political economy implications of tax evasion for progressivity in the tax structure. In so doing, we ‘start from scratch’ by constructing a simple extension of the basic Allingham and Sandmo construct that allows agents to initially decide whether to evade taxes or not. We then use a step-by-step model building procedure by taking both the basic model and its ‘evade-or-not’ counterpart towards a dynamic macroeconomic framework. We find that the 'evade or not' assumption has strikingly different and more realistic implications for the extent of evasion, and demonstrate that it is a more appropriate modeling strategy in the context of macroeconomic models. Furthermore, our numerical analysis suggests that the political outcome for the tax rate for a given level of inequality is conditional on whether there is a large or small or large extent of evasion in the economy, although changes in inequality do not matter for this outcome.

We develop a stochastic political economy model to explain the trade-off between growth and inequality during the process of technology adoption. In the model endogenous growth occurs through physical and human capital deepening. Agents can adopt either of the two risky high-return technologies, one of which is only available to those who can afford the entry cost associated with financial intermediation. We assume that this entry cost depends on the proportion of government revenue that is allocated towards cost-reducing financial development expenditure, and that agents decide on this proportion through a voting mechanism. The results show that certain interest groups comprising of both the poorest and the richest agents block the policies that are aimed at allocating resources towards costreducing financial development expenditure in the early stages of the economy’s development. However, as redistribution continues from generation to generation, the middle of the distribution successively becomes thicker and consequently the majority of agents start supporting reallocation in the form of cost-reducing financial development expenditure. In the transition to the steady state, inequality patterns show recurring ‘Kuznets-like curves’. Furthermore, high initial inequality tends to hasten the pace at which growth and inequality converge towards the steady state paths, while low inequality result in more fluctuations in transitional growth and inequality. Finally, our results show that although the political outcomes do not coincide with the welfare maximisation outcomes in the early and the transitional stages of the economy, the two outcomes eventually converge in the long-run.

The study examines the impact of financial globalisation on intra-sector and inter-sector firm level reallocation of capital in South Africa using panel data for the period 1991-2008. The measure of efficient reallocation of capital is based on the variation of firm's marginal returns to capital around the optimal level, while the measure of financial globalisation is constructed by tracing the financial reforms/restrictions that took place in South Africa since the 1970s. We find that financial globalisation is associated with a reduction of the dispersion of firms' marginal returns around their sectoral steady states suggesting that financial globalisation enhances efficient reallocation of capital. The benefits of financial globalisation seem to be stronger at the intersector rather than intra-sector level, implying that the implicit/explicit barriers to free movement of capital across firms in different sectors may limit the benefits of financial globalisation. Further results show that quality institutions are a pre-requisite if the efficiency gains from financial globalisation are to be realised. Finally, there is evidence to suggest that the benefits of financial globalisation may also manifest indirectly through its role in augmenting the domestic financial system.

We develop a stochastic endogenous growth model to explain the diversity in growth and inequality patterns and the non-convergence of incomes in transitional economies where an underdeveloped financial sector imposes an implicit, fixed cost on the diversification of idiosyncratic risk. In the model endogenous growth occurs through physical and human capital deepening, with the latter being the more dominant element. We interpret the fixed cost as 'learning by doing' cost for entrepreneurs who undertake risk in the absence of well developed financial markets and institutions that help diversify such risk. As such, this cost may be interpreted as the implicit returns foregone due to the lack of diversification opportunities that would otherwise have been available, had such institutions been present. The analytical and numerical results of the model suggest three growth outcomes depending on the productivity differences between the projects and the fixed cost associated with the more productive project. We label these outcomes as poverty trap, dual economy and balanced growth. Further analysis of these three outcomes highlights the existence of a diversity within diversity. Specifically, within the 'poverty trap' and 'dual economy' scenarios growth and inequality patterns differ, depending on the initial conditions. This additional diversity allows the model to capture a richer range of outcomes that are consistent with the empirical experience of several transitional economies.

In this paper we study an overlapping-generations model in which agents� mortality risks, and consequently impatience, are endogenously determined by private and public investment in health care. The proportion of revenues allocated for public health care is also endogenous, determined as the outcome of a voting process. Higher substitutability between public and private health is associated with a �crowding-out� effect which leads to lower public expenditures on health care in the political equilibrium. This in turn impacts on mortality risks and impatience leading to a greater persistence in inequality and long run distributions of wealth that are bimodal.

Empirical evidence suggests that there has been a divergence over time in income distributions across countries and within countries. Furthermore, developing economies show a great deal of diversity in their growth patterns during the process of economic development. For example, some of these countries converge rapidly on the leaders, while others stagnate, or even experience reversals and declines in their growth processes. In this paper we study a simple dynamic general equilibrium model with household specific costs of technology adoption which is consistent with these stylized facts. In our model, growth is endogenous, and there are two-period lived overlapping generations of agents, assumed to be heterogeneous in their initial holdings of wealth and capital. We find that in a special case of our model, with costs associated with the adoption of more productive technologies fixed across households, inequalities in wealth and income may increase over time, tending to delay the convergence in international income differences. The model is also capable of explaining some of the observed diversity in the growth pattern of transitional economies. According to the model, this diversity may be the result of variability in adoption costs over time, or the relative position of a transitional economy in the world income distribution. In the more general case of the model with household specific adoption costs, negative growth rates during the transitional process are also possible.

This paper examines the welfare costs of inflation within a dynamic general equilibrium framework that incorporates ex ante skill heterogeneity among workers. Money is introduced via a cash-in-advance constraint on the purchases of consumption. Numerical experiments based on a plausible parameterization of the model indicate that welfare costs of inflation relative to an optimal monetary policy decrease as skill heterogeneity increases. An implication of this feature is that a greater degree of skill heterogeneity would be associated with a greater tolerance for inflation, consequently implying a positive correlation between agent heterogeneity and inflation. We also conduct an empirical study based on a panel of several countries that lends some support to this hypothesis. If we focus on the experience of industrialized economies, the data finds supports a positive inflation-heterogeneity correlation. However, this is not true of less developed economies, in which the inflation heterogeneity correlation if found to be negative.

This paper seeks to analyse a case in which firms choose to divide their R&D expenditures into two components: competitive R&D and Joint-Venture R&D. The analysis is motivated by the fact that R&D outputs can have different degrees of non-excludability. It is therefore reasonable to expect that a firm will allocate a part of its funds to competitive R&D; this is the case in areas in which research is non-excludable to a smaller degree, and part of it to Joint-Venture R&D, in cases where R&D output is highly non-excludable. This issue is addressed in a three-stage model of a duopoly, in which joint-venture R&D and competitive R&D are chosen in the first and second stages while the quantity of the product is chosen in the third stage. The results confirm that allocation of expenditure to the joint-venture component increases as the spillover rate on the competitive component increases. Furthermore, if firms are able to coordinate their joint-venture R&D levels, there is greater incentive to increase this allocation. However, for these results to obtain, it is crucial that the two types of R&D are chosen sequentially; a simultaneous choice would lead to a corner solution in which only competitive R&D is chosen.

This paper uses the neoclassical growth model to evaluate the size of distortions associated with different monetary and fiscal policies designed to finance government expenditures in the presence of administration costs. The model is calibrated to match important features of U.S. data, and used to evaluate welfare costs of monetary and fiscal policies. We find that the presence of administration costs increases the welfare costs of government policies involving different combinations of taxes on capital and labour income, consumption and money holdings. In addition, the welfare implications of tax reforms designed to replace the taxes on labor or capital income with less distorting forms of taxation are altered. Another implication of the results is that in economies with larger costs of administration, revenue replacement through seigniorage would be a more attractive option than other feasible forms of taxation.

This paper examines the implications of introducing a variable rate of time preference on the role of monetary policy in a dynamic general equilibrium framework explicitly designed to capture liquidity effects. Variable time preference is incorporated by allowing the discount factor applied to future utility to be decreasing in contemporaneous utility. The model is a more general one, in the sense that the fixed discount factor economy is nested as a special case. Numerical simulations of the more general model indicate that for a range of parameters optimal monetary policy can be qualitatively different. This is in spite of the fact that there are very small quantitative differences in the magnitude of monetary non-neutralities, such as liquidity effects, in the fixed and flexible discount factor environments. Furthermore, within this range, monetary policy is less activist, in the sense that it is procyclical to productivity shocks, as opposed to being countercyclical as in the fixed time preference model.

This paper investigates the impact of anticipated inflation on features of the business cycle in the presence of recursive but intertemporally dependent tastes. Intertemporal dependence is induced by the presence of a variable or endogenous individual rate of time preference. Quantitative experiments indicate that variability in the rate of time preference can enhance the contribution of monetary shocks to the fluctuations of real variables. Another implication of the variable-time-preference model is that, unlike the fixed time preference model, the business cycle features in high inflation and low inflation economies can be very different. The contribution of monetary shocks to fluctuations increases partly because endogenous time preference accentuates inflation-tax effects, which are already present in the standard framework because of the presence of cash-in-advance constraints. The change in the relative role of monetary shocks is also related to how variable time preference alters the effects of technology shocks, which can be quantitatively or qualitatively different in comparison to the standard model, depending on the parameters of the model.

This paper examines the welfare costs of inflation within a monetary dynamic general equilibrium framework with human capital that incorporates endogenous, ex ante skill heterogeneity among workers. Numerical experiments indicate that, overall, welfare costs are more likely to decrease with increases in skill heterogeneity. An implication of this feature is that a greater degree of skill heterogeneity may be associated with a higher tolerance for inflation, consequently implying a positive correlation between agent heterogeneity and inflation. Using a panel of several countries we empirically test this proposition. Our evidence lends some support to this hypothesis. (This abstract was borrowed from another version of this item.)

Taking an interdisciplinary approach, Vai Io Lo and Mary Hiscock, together with scholars and researchers from around the world, investigate the rise of the BRICS and assess the extent of their further development and influence from the perspectives of economics, international relations and law.

This paper examines the role of monetary policy in the presence of endogenous time preference. The framework in which this issue is addressed is a monetary model with cash-in-advance constraints and an additional trading friction that is typical of the class of “liquidity models†of the monetary business cycle. We find that the nature of the optimal policy designed to remove these distortions gets modified in the presence of endogenous utility discounting. Consequently the role of monetary policy is significantly altered. Specifically, for a range of parameters that is plausible from an empirical point of view, monetary policy is likely to be less activist relative to the model with a fixed rate of time preference