How Nations Evolve
ABSTRACT: We study nations' long run development via a model micro-founded in a dynamic game between citizens and a government with unknown type and action who live in an economy with uncertainty. To diversify sector-specific risks for economic expansion, citizens save and invest in the private sectors and expect the government to invest the tax revenue into the public sectors. With measurable and changeable proportions of economic and political risks in the mix, monitoring is endogenous. An opportunistic government with preferences for both reputation and confiscation thus also has a varying desire to influence monitoring at different stages, which in turn can affect the future development of an economy. To derive the Markov Perfect Equilibrium capturing all the situations, we prove its existence and solve the strategy in a dynamic optimization problem with a dynamic constraint over a two-state space computationally. The interactions and co-movement of the equilibrium strategy, luck and the economy's two laws of motion jointly determine how nations evolve economically and politically.
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.