Correlation in Quantitative Models

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

Abstract Technology and efficiency differ across firms, countries and people, and shape important economic outcomes such as living standards and inequality. Further, these differences affect the extent of cooperation between regions as well as the policies countries implement. This research develops new models where the degree of similarity in technology across different agents plays a central role. By establishing a transparent link between observed data and economic theory, this proposal explores important questions in international economics such as the role of international technology transfer in the rise of superstar firms and industry concentration, the role of innovation and international spillover of ideas in determining technological change and country growth, and the role of correlated productivity in shaping economic policies. This research applies a particular representation for technology that flexibly accommodates theories on the determinants of productivity. By introducing tools from probability theory and working with max-stable processes, this methodology delivers closed-form results, which helps to resolve the tradeoff between model tractability and empirical realism. As a consequence, this project leads to new models that incorporate previously absent features of the data related to the creation and transfer of technology across countries as well as correlation in productivity across regions. This approach allows to understand how technological fundamentals shape economic outcomes such as economic concentration and inequality, differences in growth across countries, and both coordinated and uncoordinated economic policies. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.