Essays on total factor productivity and human capital

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Higher quality 6" x 9” black and white photographic prints are available for any photographs or illustrations appearing in this copy for an additional charge. Contact UMI directly to order. Bell & Howell Information and Learning 300 North Zeeb Road, Ann Arbor, MI 48106-1346 USA 800-521-0600 UMI ® ESSAYS ON ‘TOTAL FACTOR PRODUCTIVITY AND HUMAN CAPITAL BY SHEKHAR ATYAR M., UNIVERSITY OF TORONTO, 1997 B. STEPHEN’S COLLEGE (UNIVERSITY OF DELHI), 1992 A DISSERTATION SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN THE DEPARTMENT OF ECONOMICS AT BROWN UNIVERSITY, PROVIDENCE, RHODE ISLAND MAY 2001 UMI Number: 3006682 UMI ® UMI Microform 3006682 Copyright 2001 by Bell & Howell Information and Learning Company.

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Aiyar This dissertation by Shekhar Shankar Aiyar is accepted in its present form by the Department of Economics as satisfying the dissertation requirement for the degree of Doctor of Philosophy. Weil, Director Recommended to the Graduate School Date se] DJ Ns — Oded Galor, Reader na 0° (or _ ý/Z=—=zÊ^ Anthony Lancaster, Reader Approved by the Graduate School pate //27//0/ bs 7. Estrup Dean of the Graduate School and Research ili Curriculum Vitae Shekhar Aiyar Department of Economics Date of Birth: May, 5, 1971 Brown University Place of Birth: New Delhi, India Providence, RI 02912 Ph: (401) 421-5938 e-mail: s.com EDUCATION Brown University, Providence, Rhode Island, USA e Ph. Program in Economics (Degree Expected May 2001) e Areas of specialization: Macroeconomics, Economic Growth, Econometrics e Recipient of Teaching Fellowship and Ehrlich Fellowship University of Toronto, Toronto, Canada e MA in Economics (July 1997) e Recipient of Simcoe Special Fellowship and International Fellowship St.

Edmund Hall, Oxford University, Oxford, UK e BA in Philosophy and Economics (PPE) (May 1994) e Recipient of Inlaks Scholarship and St. Edmund Hall Open Exhibition e Received First Class Degree St. Stephen’s College, University of Delhi, Delhi, India * B. (Honors) in Economics (July 1992) e Received First Division Degree.

iv DISSERTATION Essays on Total Factor Productivity and Human Capital ACADEMIC PUBLICATIONS AND MANUSCRIPTS e “A Contribution to the Empirics of Total Factor Productivity”, with James Feyrer, Manu- script, Brown University, September 2000. e “Convergence Across the Indian States: A Panel Study”, in Callen, T. et al, eds., India at the Crossroads: Sustaining Growth and Reducing Poverty, IMF, Washington, D., February 2001 e “Total Factor Productivity Revisited: A Dual Approach to Levels-Accounting”, with Carl- Johan Dalgaard, Manuscript, Brown University, December 2000. e “Econometric Analysis of Dynamic Models: A Growth Theory Example”, with Tony Lan- caster, in Bunzel, H.

et al, eds., Panel Data and Structural Labour Market Models, North Holland, Elsevier, 2000. e “The Human Capital Constraint: Of Increasing Returns, Education Choice, and Co- ordination Failure”, Manuscript, Brown University, August 2000 (Presented at the NEUDC Con- ference, Cornell University, October 2000). e “Why Does Technology Sometimes Regress? A Model of Knowledge-Diffusion and Popula- tion Density”, with Carl-Johan Dalgaard, Manuscript, Brown University, April 2001. OTHER PUBLICATIONS e “Who’s Afraid of Population Growth ?”, Op-Ed opinion piece, Times of India, September 2000.

e “The Silent Revolution”, Op-Ed opinion piece, Times of India, August 2000 © Continental Drift, Volurne of Collected Poems, Writer’s Workshop, Calcutta, 1997 e National Income and Accounting, with Saurabh Rastogi, Undergraduate Textbook, Lotus Publishers, New Delhi, 1991 PROFESSIONAL EXPERIENCE e Instructor, Department of Economics, Brown University, 1999-2001 e Consultant, Oxus Investments and Research, New Delhi, Summer 2000 * Intern, International Monetary Fund, Washington, D., Summer 1999 Referee: Journal of Economic Growth, European Econamic Review, 1999- e Economics Don, Trinity College, University of Toronto, 1996-97 e Economics Teacher, The British School in Colombo, Sri Lanka, 1994-95 PREFACE A Ph. thesis is both a labour of love and a miracle of compression. First comes the labour of love; the endless stream of lectures, articles, internet-searches, conversa- tions and seminar presentations; the beer-soaked late-night dialogues reconciling venerable frameworks with what one fondly hopes are fresh insights. Then comes the miracle of compression; the stripping away of the inessential, the concentration of four years of rela- tively free-ranging thought into a handful of short chapters that are expected to bear some linear relation to one another.

Often the latter exercise obliterates all traces of the former. The complex influence of all the people without whom one’s dissertation would not have been started, sustained or completed is quite obscured behind the inscrutable theorems and cursory literature reviews. Luckily prefaces were invented to redress the balance - to remember, to recount, and above all, to give thanks. I was extremely fortunate in my choice of advisors.

David Weil walked me through the maze of graduate economics with Socratic forbearance and an unerring ability to tell the escape route from the blind alley. Oded Galor taught a course in growth theory so superb that it made my choice of specialization easy. Tony Lancaster gave me the confidence to embark on independent research by co-authoring a paper with me in my second year, and by reminding me that Time’s Winged Charriot Hurries Near. Several professors at Brown University commented on the papers that I wrote.

Peter Howitt encouraged me greatly by always being available to discuss ideas old and new. I received much guidance from John Driscoll, Pravin Krishna and Andrew Foster. My second summer in graduate school was spent at the IMF, where Chris Towe and Patricia Reynolds, with unusual kindness, put me to work on an independent project connected with vũ my research interests. My third summer was spent working in New Delhi with Surjit Bhalla, who taught me the practical value of triple-checking one’s data-set for inconsistencies before even thinking of running regressions.

From my friends and colleagues in the department I learned more than any book has ever taught me. Brown University enjoys considerable economies of scale in the large number of aspiring growth theorists that it produces; of these economies I was a grate- ful beneficiary. Areendam Chanda, Kyung-Mook Lim, Len Erickson, Seiro Ite, Azam Chaudhry, Phil Garner and several others conspired to make lunch in the Blue Room a source of intellectual inspiration. Jim Feyrer and Carl-Johan Dalgaard went a step further and wrote considerable bits of my dissertation for me.

My thanks must also wing their way to my families, who have supported me through thick and thin, wherever in the world I have found myself and however limitless my time in school has seemed to grow. Papa, Mum, Naiyya, Shahnaz, Gang: to you I owe far more than this Ph. Franziska Ohnsorge was force-fed early drafts of all my papers, each of which she was able to improve with casual ease. It is remotely possible that this dissertation would have heen written without her.

But in her absence its writing may not have seemed as worthwhile, nor my years in graduate school as enjoyable. Contents 1 A Contribution to the Empirics of Total Factor Productivity 1. - ee ee ee ee 1.0202 ee eee ee ee ee ee es 1. eee ee ee TY 1.2 Technological Spillovers and Human Capital.3 Calculating Total Factor Productivity .1 Methodology and Data .02 ee eee eee 11 The Model.

ce tee ee te te eee ee 13 1. ee ee ee eee 18 1.2 Dynamic and Static Effects of Human Capital .3 Fixed Effects, Steady State Productivity and Human Capital .7 Alternative Samples and Specifications .3 Human Capital Specification .4 Disaggregated Human Capital .9 Appendix A:Data on the Share of Mining .10 Appendix B: GMM Estimation. fe ee eee ee 38 The Human Capital Constraint: Of Increasing Returns, Education Choice and Coordination Failure 42 2. eee ee ee eee 42 2.1 Three Hypotheses anda Puzzle .2 Outline and Literature Review .2 The Two-Sector Model.

0-002 eee eee ee ee ee 48 2. eee ee ee ee ee 48 2.2 Individuals and Education Choice .4 Minimum Scale and Co-ordination Falure.3 The Three Sector Model. eee ee ee ee ee 57 2.2 Individuals and Education Choice. 0-00 eee ee ee ee ee 59 2.4 Equilibrium With Three Sectors.

ee ee ee ee eee 62 2.6 Equilibrium With Two Sectors.7 Co-ordination and Subsidies. ee ee ee 69 2.22 ee eee te te eee 72 Total Factor Productivity Revisited: A Dual Approach to Levels Ac- counting 75 3-l Introduction. ee ee te te ee 75 P “hAMN\ aaiNlNNiiiắaiiẳẮẢ. ee ee ee 81 3.4 Results: Primal vs.

-- ee ee ee eee 84 3.5 Income Shares and The Cobb-Douglas Hypothesis. Multi-Factor Productivity .2 ee eee ee es 95 3. ee ee ee ee ee 105 The Econometric Analysis of Dynamic Panel Models: A Growth Theory Example 109 4. 2 000+ eee ee te eee 111 4.

Construction of the PriOT. Q Q Q Q ee TT 113 Sampling the Posterior. 2 ee ee et ee 117 Concluding Remarks. 0 ee eee ee eee ee ee ee 120 References.

ee et ee ee ee 128 List of Tables 1.1 The Evolution of TFP for a Selection of Countries .2 Variance Decomposition of Log Incomes by Year .3 Regression Results - non-OECD countries. ee ee ee 19 1.4 Variance Decomposition of Steady State Productivity .5 esults Íor the Full SampÌl. - Q ee ee ee ee 25 1.6 Results With and Without Adjusting for Natural Resource-Extraction .7 Results With an alternative human capital specification. 27 18 Results With Disaggregated Schoolng.

Q eeee ee ee 97 Š.Q Q Q Q Q Q Q Q TK Ty UY Kia 98 3.3 Factor Shares and Factor Returns. 2 ee ee ee 100 List of Figures 11 The Effect of Shocks to Human Capital on Productivity Growth Rates .2 The Effect of Shocks to Human Capital on Productivity Levels.3 The Effect of Shocks to Human Capital on Output .2 ee ee ee ee ee ee ee eee 101 3.3 National Accounts Vs.4 National Accounts Vs.5 Primal TFP Vs.1 Rho Posterior Distribution. eee ee ee ee ee 122 4.2 Lambda Posterior Distribution .0-----2---- 123 43 Beta One Posterior Distribution. - - - - - ve He xa 124 4.4 Beta T'wo Posterior Distribution.

- - ‹ cv Q Q1Ra Kẻ.5 Sum of the Regressor Coefficients .6 Posterior Density Contours. 2-6 ee ee ee ee ee ee ee 127 CHAPTER 1 A Contribution to the Empirics of Total Factor Productivity With James Feyrer 1.1 Introduction Over the last decade the literature has seen a lively debate as to whether it is differences in factor accumulation or in total factor productivity (TFP) that are mainly responsible for the observed variation in per capita incomes across countries. This paper argues that the dichotomy is spurious, resting on a conflation of the proximate determinants of income variation with the ultimate determinants of the same. Two important recent contributions to the debate are Klenow and Rodriguez-Clare (1997) and Hall and Jones (1999).