Academic Research

Zhao, D., Chen, Y. & Shen, J.H., 2020. Mortgage Payments and Household Consumption in Urban China. Economic Modelling , 93 , pp. 100-111. Publisher's VersionAbstract

By exploiting variation both in mortgage payoffs and mortgage interest rate resets, we find that a decline in mortgage payments induces a significant increase in nondurable goods spending, even when households have substantial amounts of liquidity. Following mortgage payoff, households increase consumption expenditures by 61% of the original payment. In comparison, households increase consumption by only 36% in response to a transitory payment adjustment induced by interest rate changes. Households with a higher payment-to-income ratio have a significantly lower marginal propensity to consume (MPC). These results have practical implications for policy markers seeking to design consumption boosting policies and are important for understanding how changes in monetary policy may affect consumer spending patterns.

Knowledge Diffusion in the Network of International Business Travel
Coscia, M., Neffke, F. & Hausmann, R., 2020. Knowledge Diffusion in the Network of International Business Travel. Nature Human Behaviour , 4 (10). Publisher's VersionAbstract

We use aggregated and anonymized information based on international expenditures through corporate payment cards to map the network of global business travel. We combine this network with information on the industrial composition and export baskets of national economies. The business travel network helps to predict which economic activities will grow in a country, which new activities will develop and which old activities will be abandoned. In statistical terms, business travel has the most substantial impact among a range of bilateral relationships between countries, such as trade, foreign direct investments and migration. Moreover, our analysis suggests that this impact is causal: business travel from countries specializing in a specific industry causes growth in that economic activity in the destination country. Our interpretation of this is that business travel helps to diffuse knowledge, and we use our estimates to assess which countries contribute or benefit the most from the diffusion of knowledge through global business travel.

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What Would Happen if Business Travel Stopped?

With COVID-19 forcing widespread adoption of virtual communication for much of the world, some wonder if these remote business practices will become the norm. Before the pandemic, international business travel was a $1.5 trillion annual expense – an expense that’s increasing about 7% a year. Why are corporations willing to absorb this cost when technologies such as Skype, FaceTime, Zoom, WebEx, etc., have been widely available for the better part of a decade?

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Hausmann, R. & Schetter, U., 2020. Horrible Trade-offs in a Pandemic: Lockdowns, Transfers, Fiscal Space, and Compliance.Abstract

In this paper, we develop a heterogeneous agent general equilibrium framework to analyze optimal joint policies of a lockdown and transfer payments in times of a pandemic. In our model, the effectiveness of a lockdown in mitigating the pandemic depends on endogenous compliance. A more stringent lockdown deepens the recession which implies that poorer parts of society find it harder to subsist. This reduces their compliance with the lockdown, and may cause deprivation of the very poor, giving rise to an excruciating trade-off between saving lives from the pandemic and from deprivation. Lump-sum transfers help mitigate this trade-off. We identify and discuss key trade-offs involved and provide comparative statics for optimal policy. We show that, ceteris paribus, the optimal lockdown is stricter for more severe pandemics and in richer countries. We then consider a government borrowing constraint and show that limited fiscal space lowers the optimal lockdown and welfare, and increases the aggregate death burden during the pandemic. We finally discuss distributional consequences and the political economy of fighting a pandemic.

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The Value of Complementary Coworkers

In today’s world, most workers are highly specialized, but this specialization can come at a cost – especially for those on the wrong team. New research by Growth Lab Research Director Frank Neffke assesses the importance of the skills of coworkers. Finding coworkers who complement and not substitute one’s skills can significantly impact earning potential. The impact is equal to having a college degree. Coworker complementarity also drives careers...

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Schetter, U., 2020. Quality Differentiation, Comparative Advantage, and International Specialization Across Products.Abstract

We introduce quality differentiation into a Ricardian model of international trade. We show that (1) quality differentiation allows industrialized countries to be active across the full board of products, complex and simple ones, while developing countries systematically specialize in simple products, in line with novel stylized facts. (2) Quality differentiation may thus help to explain why richer countries tend to be more diversified and why, increasingly over time, rich and poor countries tend to export the same products. (3) Quality differentiation implies that the gains from inter-product trade mostly accrue to developing countries. (4) Guided by our theory, we use a censored regression model to estimate the link between a country’s GDP per capita and its export quality. We find a much stronger relationship than when using OLS, in line with our theory.

Shen, J.H., et al., 2020. Profit Sharing, Industrial Upgrading, and Global Supply Chains: Theory and Evidence.Abstract

This paper constructed a simple model to illustrate the global supply chain profit sharing and industrial upgrading mechanism, from which it was found that the average profitability distribution in the different supply chain stages was determined by two main factors: (1) the average product of the labor in the firms at each production stage; and (2) the ratio of the output elasticity of capital to the output elasticity of labor in each stage. This paper also proposed a new industrial upgrading mechanism, the ‘inter-supply chain upgrading’, for supply chain firms. Rises in production complexity and increased factor intensity in each production stage were found to be the two essential conditions for the inter-supply chain upgrading. The empirical study results were found to be broadly consistent with the proposed theories.

Revised May 2020.
Machine-learned patterns suggest that diversification drives economic development
Gomez, A., et al., 2020. Machine-learned patterns suggest that diversification drives economic development. Journal of the Royal Society Interface , 17 (162). Publisher's VersionAbstract
We combine a sequence of machine-learning techniques, together called Principal Smooth-Dynamics Analysis (PriSDA), to identify patterns in the dynamics of complex systems. Here, we deploy this method on the task of automating the development of new theory of economic growth. Traditionally, economic growth is modelled with a few aggregate quantities derived from simplified theoretical models. PriSDA, by contrast, identifies important quantities. Applied to 55 years of data on countries’ exports, PriSDA finds that what most distinguishes countries’ export baskets is their diversity, with extra weight assigned to more sophisticated products. The weights are consistent with previous measures of product complexity. The second dimension of variation is proficiency in machinery relative to agriculture. PriSDA then infers the dynamics of these two quantities and of per capita income. The inferred model predicts that diversification drives growth in income, that diversified middle-income countries will grow the fastest, and that countries will converge onto intermediate levels of income and specialization. PriSDA is generalizable and may illuminate dynamics of elusive quantities such as diversity and complexity in other natural and social systems.
Neffke, F., Nedelkoska, L. & Wiederhold, S., 2015. Skill Mismatch and the Costs of Job Displacement.Abstract
When workers are displaced from their jobs in mass layoffs or firm closures, they experience lasting adverse labor market consequences. We study how these consequences vary with the amount of skill mismatch that workers experience when returning to the labor market. Using novel measures of skill redundancy and skill shortage, we analyze individuals’ work histories in Germany between 1975 and 2010. We estimate difference-in-differences models, using a sample in which we match displaced workers to statistically similar non-displaced workers. We find that displacements increase the probability of occupational change eleven fold, and that the type of skill mismatch after displacement is strongly associated with the magnitude of post-displacement earnings losses. Whereas skill shortages are associated with relatively quick returns to the counterfactual earnings trajectories that displaced workers would have experienced absent displacement, skill redundancy sets displaced workers on paths with permanently lower earnings.
The Value of Complementary Coworkers
Neffke, F., 2019. The Value of Complementary Coworkers. Science Advances , 5 (12). Publisher's VersionAbstract

As individuals specialize in specific knowledge areas, a society’s know-how becomes distributed across different workers. To use this distributed know-how, workers must be coordinated into teams that, collectively, can cover a wide range of expertise. This paper studies the interdependencies among co-workers that result from this process in a population-wide dataset covering educational specializations of millions of workers and their co-workers in Sweden over a 10-year period. The analysis shows that the value of what a person knows depends on whom that person works with. Whereas having co-workers with qualifications similar to one’s own is costly, having co-workers with complementary qualifications is beneficial. This co-worker complementarity increases over a worker’s career and offers a unifying framework to explain seemingly disparate observations, answering questions such as “Why do returns to education differ so widely?” “Why do workers earn higher wages in large establishments?” “Why are wages so high in large cities?”

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Nedelkoska, L. & Neffke, F., 2019. Skill Mismatch and Skill Transferability: Review of Concepts and Measurements. Papers in Evolutionary Economic Geography , 19 (21). Publisher's VersionAbstract
The notion of skills plays an increasingly important role in a variety of research fields. Since the foundational work on human capital theory, economists have approached skills through the lens of education, training and work experience, whereas early work in evolutionary economics and management stressed the analogy between skills of individuals and the organizational routines of firms. We survey how the concept of skills has evolved into notions such as skills mismatch, skill transferability and skill distance or skill relatedness in labor economics, management, and evolutionary approaches to economics and economic geography. We find that these disciplines converged in embracing increasingly sophisticated approaches to measuring skills. Economists have expanded their approach from quantifying skills in terms of years of education to measuring them more directly, using skill tests, self-reported skills and job tasks, or skills and job tasks reported by occupational experts. Others have turned to administrative and other large-scale data sets to infer skill similarities and complementarities from the careers of sometimes millions of workers. Finally, a growing literature on team human capital and skill complementarities has started thinking of skills as features of collectives, instead of only of individuals. At the same time, scholars in corporate strategy have studied the micro-determinants of team formation. Combined, the developments in both strands of research may pave the way to an understanding of how individual-level skills connect to firm-level routines.
Schetter, U., Gersbach, H. & Schneider, M.T., 2019. Taxation, Innovation, and Entrepreneurship. The Economic Journal , 129 (620) , pp. 1731-1781. Publisher's VersionAbstract
We explore optimal and politically feasible growth policies consisting of basic research investments and taxation. We show that the impact of basic research on the general economy rationalises a taxation pecking order with high labour taxes and low profit taxes. This scheme induces a significant proportion of agents to become entrepreneurs, thereby rationalising substantial investments in basic research fostering their innovation prospects. These entrepreneurial economies, however, may make a majority of workers worse off, giving rise to a conflict between efficiency and equality. We discuss ways of mitigating this conflict, and thus strengthening political support for growth policies.
Schetter, U., 2019. A Structural Ranking of Economic Complexity.Abstract
We propose a structural alternative to the Economic Complexity Index (ECI, Hidalgo and Hausmann 2009; Hausmann et al. 2011) that ranks countries by their complexity. This ranking is tied to comparative advantages. Hence, it reveals information different from GDP per capita on the deep underlying economic capabilities of countries. Our analysis proceeds in three main steps: (i) We first consider a simplified trade model that is centered on the assumption that countries’ global exports are log-supermodular (Costinot, 2009a), and show that a variant of the ECI correctly ranks countries (and products) by their complexity. This model provides a general theoretical framework for ranking nodes of a weighted (bipartite) graph according to some under- lying unobservable characteristic. (ii) We then embed a structure of log-supermodular productivities into a multi-product Eaton and Kortum (2002)-model, and show how our main insights from the simplified trade model apply to this richer set-up. (iii) We finally implement our structural ranking of economic complexity. The derived ranking is robust and remarkably similar to the one based on the original ECI.
Bustos, S. & Yıldırım, M.A., 2019. Production Ability and Economic Growth.Abstract
Production is shaped by capability requirements of products and availability of these capabilities across locations. We propose a capabilities based production model and an empirical strategy to measure product sophistication and location’s production ability. We apply our framework to international trade data, and employment data in the US, recovering measures of production ability for countries and cities, and sophistication of products and industries. We show that both country and city level measures have a strong correlation with income, and economic growth at different time horizons. Product sophistication is positively correlated with measures like education and training needed in the industry. Our model-based estimations also predict the diversification patterns through the extensive margin.
Popularity Spikes Hurt Future Chances For Viral Propagation of Protomemes
Coscia, M., 2018. Popularity Spikes Hurt Future Chances For Viral Propagation of Protomemes. Communications of the ACM , 61 (1) , pp. 70-77. Publisher's VersionAbstract
A meme is a concept introduced by Dawkins12 as an equivalent in cultural studies of a gene in biology. A meme is a cultural unit, perhaps a joke, musical tune, or behavior, that can replicate in people's minds, spreading from person to person. During the replication process, memes can mutate and compete with each other for attention, because people's consciousness has finite capacity. Meme viral spreading causes behavioral change, for the better, as when, say, the "ALS Bucket Challenge" meme caused a cascade of humanitarian donations,a and for the worse, as when researchers proved obesity7 and smoking8 are socially transmittable diseases. A better theory of meme spreading could help prevent an outbreak of bad behaviors and favor positive ones.

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