Monitoring and Nations' Evolution
ABSTRACT: We study the feedback dynamics between nations’ long-run political and economic development via a model micro-founded in a dynamic game between the citizens and a government. The government’s type and actions are unobservable. Capital accumulation is realized through diversification of sector-specific risks. Citizens save and invest in the private sectors and expect the government to invest tax revenue into the public sectors. The co-existence and varying distribution of economic and political risks allow for endogenization of monitoring. An opportunistic government then exhibits a varying strategy to influence monitoring (and give up predation) at different levels of capital and public trust. The strategy in turn determines both variables’ dynamics and feeds into future political and economic development. To derive the equilibrium, we prove its existence and computationally solve the strategy under an evolving incentive compatibility constraint in a two-state-variable space. The interactions and co-movement of the equilibrium strategy, risks, and the economy’s two laws of motion jointly determine nations’ evolution trajectories.
Housing and Wealth Accumulation in Urban China, Before and After the 1994 Housing Reform
-with Christoph Winter and Fabrizio Zilibotti
ABSTRACT: We empirically document large increases in financial wealth and housing wealth/income ratios of urban Chinese households between 1995 and 2002. We analyze the drivers behind these trends with the help of a quantitative model with endogenous housing choice and housing sector choice. Our focus is on the supply change, the preference shock and the institutional changes that the urban housing market experienced following the 1994 housing reform, in particular the introduction of mortgage markets and the introduction of a large private housing market replacing the allocation of housing through state-owned enterprises. We find that the supply change, the preference shock as well as the introduction of private housing markets are important, the latter by resolving misallocation that is present in the pre-reform allocation of dwellings, which distorts households’ optimal choices. The introduction of the mortgage markets has a limited impact. We conclude that housing related factors including institutional changes affect Chinese households’ saving behavior and can explain a significant part of the data trends.
A Tale of Two Civilizations
ABSTRACT: We micro-found the payoff matrix of the prisoners' dilemma game that allows for economic growth. Collectivists are matched to play the game and can be (non-)trustworthy. Individualists don't participate in the game and can produce intermediate goods used by collectivists in their production of the final good. Parents rationally choose to transmit (non-)trustworthiness values to or cultivate individualism in their children, and this choice is influenced by spatial patterns of cooperation, productivity and enforcement institutions. The European and Chinese civilizations evolve on distinct economic, cultural and institutional trajectories due to a mere difference in initial social distance. Individualism and contracting institutions develop in Europe while proximity matching is popular in China. As a result, the European development path features a high level of initial conflicts, early emergence of individualism and contracting institutions, both of which lead to innovations and faster economic development. Moreover, the development of contracting institutions expands the scope of cooperation and induces generalized morality. The Chinese development path features a low level of initial conflicts, a large initial scope of cooperation but late emergence of individualism. Proximity matching increases cooperation within a narrow group, facilitates collectivist culture and postpones emergence of innovative spirits.
The Race between Technology and Education