Vintage-Capital, Distortions and Development

University Of Pennsylvania, Philadelphia PA

Investigators

Abstract

This project improves our understanding of how economic factors affect income differences across countries. The focus of the research will be on the adoption of new technology in a "vintage capital" context. Vintage capital is a scenario whereby new technology can be implemented only if new machines that embody it are brought on line. This is different from the scenario of homogeneous capital, where technological progress can be exploited without the purchase of new machines. Vintage capital is quite a bit harder to deal with, which is the reason that many analyses have focused on homogenous capital. The thesis of this research is that models of vintage capital can be made manageable and empirically operational, and that they perform much better than models of homogenous capital. In particular they can explain income gaps and the particular mechanisms that lead to such gaps much better. Of late there have been suggestions in the economic literature that cultural and other non-economic factors explain a great deal of income differences across countries. The thesis of this project is that a carefully crafted economic model will do quite well without having to resort to such non-economic explanations. More specifically, this project analyzes models of embodied technological progress and vintage capital. The objective is to determine the extent to which distortions to the adoption of new technology can block economic growth. Distortions are broadly understood: They could be taxes and tariffs on the purchase of machines, bureaucratic impediments to the construction of structures and production facilities, delays, corruption, red tape, etc. The project constructs a quantitative model, capable of delivering numerical results concerning the effects of such distortions: To what extent distortions stifle investments, the capital stock of a country, the adoption decisions of manufacturers, wages of workers, and the GDP of a country. The project pursues a three-pronged approach. First, a theoretical model of the adoption of new technology by individual firms is constructed. Considering many such firms the model will then be aggregated to yield the theoretical counterparts of National Income statistics. Second, the model's parameters are calabrated using U.S. National Income data. The investigator also estimates econometrically the model's production function, using international data. These two steps provide a quantitative model, which is designed to predict the extent to which distortions can stifle the growth of an economy. Third, the project considers different countries as having different distortions and then determine what the model predicts will happen to their GDP. The investigator performs development decomposition exercises, determining how distortions, educational levels and efficiencies account for GDP differences across countries.