Weekly NBER Digest 2/14/16

I decided to start a series of weekly blog posts on the new NBER working papers on development economics, labor economics, and international trade that I find interesting. In the past few months, I have experienced the excitement of finding an interesting research question, going through the empirical methodology to answer the question, cleaning data, and then figuring out there is not enough variation to answer my question (due to the contextual nature of the question). Now I am opening myself up to new ideas, and my NBER digests will serve this purpose as well.

1. How does taxation affect growth through corruption?

This working paper builds an endogenous growth model to examine the relationship between taxation, corruption, and economic growth. Taxes have disincentive effects on entrepreneurs, but also provide them with public infrastructure. Political corruption governs how efficient tax revenues are translated into infrastructure. The model predicts an inversed-U relationship between taxation and growth, which is consistent with data from the Longitudinal Business Database (LBD) at the US Census Bureau.

This paper is an example of combining macro modeling with micro empirical analysis to address an interesting question.

2. Are trade policies no longer important?

This working paper by Goldberg and Pavcnik describes the declining research interest in assessing the impact of trade policies and reasons for this decline, and suggests future areas of research. A lot of useful insights. As an example,

The variation in trade policy across cross-sectional units and time is only helpful for identifying the effects of trade policy in the presence of some type of friction and/or heterogeneity in exposure to policy change. … the main limitation of relying on differential exposure of economic agents to trade policy to identify its causal effects is … that this approach by its nature will generally reveal only the relative and not absolute effects of a policy change. The latter require a theoretical framework within which the relative effects can be interpreted.

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