SIEPR Discussion paper No. 99-11
Understanding Digital Technology's Evolutions and The Path of Measured Productivity Growth: Present and Future in the Mirror of the Past
Paul A. David
January 2000

Three styles of explanation have been advanced by economists seeking to account for the so-called "productivity paradox". The coincidence of a persisting slowdown in the growth of measured total factor productivity (TFP) in the US, since the mid-1970's, with the wave of information technology (It) innovations, is said by some to be an illusion due to the mismeasurement of real output growth; by others to expose the mistaken expectations about the benefits of computerization; and by still others to reflect the amount of time, and the volume of intangible investments in "learning", and the time required for ancillary innovations that allow the new digital technologies to be applied in ways that are reflected in measured productivity growth. This paper shows that rather than viewing these as competing hypotheses, the dynamics of the transition to a new technological and economic regime based upon a general purpose technology (GPT) should be understood to be likely to give rise to all three "effects." It more fully articulates and supports this thesis, which was first advanced in the "computer and dynamo" papers by David (1990, 1991). The relevance of that historical experience is re-asserted and supported by further evidence rebutting skeptics who have argued that the diffusion of electrification and computerization have little in common.

New evidence is produced about the links between IT use, mass customization, and the upward bias of output price deflators arising from the method used to "chain in" new products prices. The measurement bias due to the exclusion of intangible investments from the scope of the official national product accounts also is examined. Further, it is argued that the development of the general-purpose PC delayed the re-organization of businesses along lines that would have more directly raised task productivity, even though the technologies yielded positive "revenue productivity" gains for large companies. The paper concludes by indicating the emerging technical and organizational developments that are likely to deliver a sustained surge of measured TFP growth during the decades that lie immediately ahead.

Download this paper (PDF).

SIEPR Discussion paper No.99-1
Is Public R&D a Complement of Substitute for Private R&D? A Review of the Economic Evidence
Paul A. David, Bronwyn H. Hall, and Andrew A. Toole
September 1999

Is public R&D spending complementary and thus “additional” to private R&D spending, or does it substitute for and tend to “crowd out” private R&D? Conflicting answers are given to this question. We survey the body of available econometric evidence accumulated over the past 35 years. A framework for analysis of the problem is developed to help organize and summarize the findings of econometric studies based on time series and cross-section data from various levels of aggregation (laboratory, firm, industry, country). The findings overall are ambivalent and the existing literature as a whole is subject to the criticism that the nature of the “experiment(s)” that the investigators envisage is not adequately specified. We conclude by offering suggestions for improving future empirical research on this issue.

Download this paper (PDF).

This chapter focuses on the nature of the macroeconomic growth process that has characterized the United States experience, and manifested itself in the changing pace sources of the rise real output per capita in U.S. economy during the past two hundred years. Our main interest is indeed, the twentieth century, but we believe that its major characteristics and the nature of the underlying forces at work are clearly seen in comparisons between the century just past and the one that came before.

A key observation that emerges from the long-term quantitative economic record is that the proximate sources of increases in real gross domestic product per capita in the century between 1889 and 1989 were quite different from those which obtained during the first one hundred years of American national experience. Baldly put, the national economy moved from margin has become more and more dependent upon the acquisition and exploitation of technological and organizational knowledge.

SIEPR Discussion paper No. 98-3
Early Twenthieth Century Productivity Growth Dynamics: An Inquiry into the Economic History of "Our Ignorance"
Paul A. David and Gavin Wright
March 1999-Revised April 1999

A marked acceleration of total factor productivity (TFP) growth in U.S. manufacturing followed World War I. This development contributed substantially to the absolute and relative rise of the domestic economy's aggregate TFP residual, which is observed when the "growth accounts" for the first quarter of the twentieth century are compared with those for the second half of the nineteenth century. Two visions of the dynamics of productivity growth are germane to an understanding of these developments. One emphasizes the role of forces affecting broad sections of the economy, through spillovers of knowledge and the diffusion of general purpose technologies (GPT's). The second view considers that possible sources of productivity increase are multiple and idiosyncratic. Setting aside possible measurement errors, the latter approach regards sectoral and economy-wide surges of the TFP growth to be simply the result of which carried more weight than others. Although there is room for both views in an analysis of the sources of the industrial TFP acceleration during the 1920's, we find the evidence more compelling in support of the first approach. The proximate source of the TFP surge lay in the switch from declining or stable capital productivity to a rising output-capital ratio, which occurred at this time in many branches of manufacturing, and which was not accompanied by slowed growth in labor productivity. The 1920's saw critical advances in the electrification industry, the diffusion of a GTP that brought significant fixed capital-savings. But the same era also witnessed profound transformations in the American industrial labor market, followed the stoppage of mass immigration from Europe; rising real wages provided strong impetus to changes in workforce recruitment and management practices that were underway in some branches of the economy before the War. The productivity surge reflected the confluence of these two forces. This historical study has direct relevance for policies intended to increase the rate of productivity growth. In many respects, the decade of the 1920's launched the US economy on a high-growth path that lasted until the 1970's. If we hope to return to the growth performance of that era, we would be well advised to understand how it began.

Download this paper (PDF).

SIEPR Discussion paper No.485
From Market Magic to Calypso Science Policy
Paul A. David
February 1997

The current reconsideration of public research funding policies in the U.S., and U.K. and other industrialized economies makes it important that policy makers and the public understand the valid economic grounds for government support of science. This review article of a book recently published in Britain and the U.S., which argues for the ending of all government support of non-military R&D, provides an occasion to take stock of what is known about the subject. This review article concludes that laissez-faire science policy arguments advanced by Terrance Kealey's book are analytically without foundation, and are based upon distortions and misinterpretations of the evidence of economic history, as well as on the misuse of economic methods.

SIEPR Discussion paper No. 99-9
Tax Externalities of Equity Mutual Funds
Joel M. Dickson, John B. Shoven, and Clemens Sialm
December 1999

Investors holding mutual funds in taxable accounts face a classic externality. The after-tax return of their investment depends on the behavior of others. In particular, redemptions may force the mutual fund to sell some of its equity positions in order to pay off the liquidating investors. As a result, the mutual fund may be forced to distribute realized capital gains to its shareholders. The taxes of investors staying with the fund are accelerated by the actions of those leaving the fund. On the other hand, new investors convey a positive externality upon existing investors by diluting the unrealized capital gain position of the fund. The simulations presented in this paper show that these externalities are important determinants of the after-tax performance of equity mutual funds. Mutual fund managers can significantly influence the magnitude of these externalities by choosing tax-efficient accounting techniques and investment policies.

The authors would like to thank Olivia Lau of Stanford for superb assistance with this research. We also have benefited from discussions, information and ideas from Fred Grauer, Keith Lawson, Davide Lombardo, Jim Poterba, John Rea, Douglas Shackelford, and conference participants at the NBERÕs "The Economic Effects of Taxation." Research support from the Smith-Richardson Foundation and the NBER are gratefully acknowledged. The opinions expressed in this paper are those of the authors and do not necessarily reflect the views of The Vanguard Group Inc., its affiliates, or its Board of Directors.

Download this paper (PDF).

SIEPR Discussion paper No. 488
Relational Financing as an Institution and its Viability under Competition
Masahiko Aoki, Serdar Dinc
May 1997

This paper presents a new, generic definition of relational financing that may cover a wide range of financial practices in different economies, ranging from the Japanese main bank relationship, to bank lending to smaller firms, and venture capital in the U.S. It then discusses various incentives of the financier to commit to relational financing and reviews the recent literature on issues about how those incentives are affected by increasing competition. One useful insight is that increasing competition is not necessarily harmful to relational financing. It then applies theoretical insights to problems of institutional transition in two Asian economies. It argues that the Japanese financial system will retain some aspects of relational financing even after the impending financial deregulation, although there will be a significant reduction in the bank's role in corporate governance. Finally, it assesses that the ongoing experiment of main bank relationship in China may be one of viable financial options for successful transition of the planned economy to a market economy, but cautions that more competition in the banking sector is necessary for relational banking to emerge as an institution.

SIEPR Discussion paper No. 480
The Incentive for Non-Price Discrimination by an Input Monopolist
Nicholas Economides
January 1997

This paper considers the incentive for non-price discrimination of a monopolist in an input marker who also sells in an oligopoly downstream market through a subsidiary. Such a monopolist can raise the costs of the rivals to its subsidiary through discriminatory quality degradation. We find that the monopolist always has the incentive to raise the costs of the rivals to its subsidiary in a discriminatory fashion, but does not have the incentive to raise costs to the whole downstream industry including its subsidiary. Moreover, increasing rivals' costs nullifies the effects of traditional imputation floors, and prompts the creation of imputation floors that account for the artificial costs imposed on downstream rivals. The results of this paper raise concerns about the potentially anti-competitive effects of entry of local exchange carriers in long distance service.

SIEPR Discussion paper No. 486
The Incentive for Non-Price Discrimination by an Input Monopolist
Nicholas Economides
April 1997

This paper considers the incentive for non-price discrimination of a monopolist in an input market who also sells in an oligopoly downstream market through a subsidiary. Such a monopolist can raise the costs of the rivals to its subsidiary through discriminatory quality degradation. We find that the monopolist always, even when it is cost-disadvantaged, has the incentive not to raise costs to the whole downstream industry including its subsidiary. Moreover, increasing rivals' costs nullifies the effects of traditional imputation floors, and prompts the creation of imputation floors that account for the artificial costs imposed on downstream rivals. The results of this paper raise concerns about the potentially anti-competitive effects of entry of local exchange carriers in long distance service.

SIEPR Discussion paper No. 483
Strategic Commitments and the Principle of Reciprocity in Interconnection Pricing
Nicholas Economides, Giuseppe Lopomo, Glenn Woroch
September 1996

We discuss the effects of strategic commitments and of network size in the process of setting interconnection fees across competing networks. We also discuss the importance of the principles of reciprocity and imputation of interconnection charges on market equilibria. Reciprocity means that both networks charge the same for interconnection. Imputation means that a network charges its customers as much as it charges customers of the other network for the same service. Assuming that each consumer cannot subscribe to more than one network, we begin by analyzing a game of strategic symmetry where the two networks choose all prices simultaneously. Second, we allow a dominant network to set the interconnection fee before the opponent network can set its prices. This results in a price-squeeze on the rival network. Third, we show that the imposition of the reciprocity rule eliminates the strategic power of the first mover. Under reciprocity, one network sets the common interconnection fee at cost, and the equilibrium prices for final services are lower than in the two previous games without reciprocity. Moreover, prices under reciprocity obey the principle of imputation. In the long run, consumers subscribe to one of the two networks. Typically, there is a multiplicity of equilibria, including corner equilibria, where all consumers subscribe to the same network. However, under reciprocity, there are no corner equilibria.

SIEPR Discussion paper No. 484
Regulatory Pricing Rules To Neutralize Network Dominance
Nicholas Economides, Giuseppe Lopomo, Glenn Woroch
November 1996

This paper evaluates the effectiveness of several pricing rules intended to promote entry into a network industry dominated by an incumbent carrier. Drawing on the work of Cournot and Hotelling, we develop a model of competition between two interconnected networks. In a symmetric equilibrium, the price of cross-network calls exceeds the price of internal calls. This "calling circle discount" tends to "tip" the industry to a monopoly equilibrium as would a network externality. By equalizing charges for terminating calls, reciprocity eliminates differences between internal and cross-network prices and makes monopoly less likely. Imputation counteracts an incentive by the dominant network to "price squeeze" a rival by eliminating differences in the wholesale price of termination and the implicit price for internal use. By increasing profits of rival networks and increasing their subscribers' surplus, imputation supports additional entry. Finally, an unbundling rule reduces termination fees charged by a network that was engaging in pure bundling. Again, entry will be facilitated as rival networks offer potential subscribers a more attractive rate schedule.

SIEPR Discussion paper No. 490
Education and Saving: The Long-Term Effects of High School Financial Curriculum Mandates
B. Douglas Bernheim, Daniel M. Garrett, Dean M. Maki
June 1997

Over the last forty years, the majority of states have adopted consumer education policies, and a sizable minority have specifically mandated that high school students receive instruction on topics related to household financial decision-making (budgeting, credit management, saving and investment, and so forth). In this paper, we attempt to determine whether the curricula arising from these mandates have had any discernable effect on adult decisions regarding saving. Using a unique household survey, we exploit the variation in requirements both across states and over time to identify the effects of interest. The evidence indicates that mandates have significantly raised both exposure to financial curricula and subsequent asset accumulation once exposed students reached adulthood. These effects appear to have been gradual rather than immediate--a probable reflection of implementation lags.

SIEPR Discussion paper No. 04-026
Does Educational Tracking Affect Performance and Inequality? Differences-In-Differences Evidence Across Countries
Eric A. Hanushek and Ludger Wößmann
February 2005

SIEPR Discussion paper No. 04-025
The market for Teacher Quality
Eric A. Hanushek John F. Kain, Daniel M. O’Brien, and Steven G. Rivkin
February 2005

SIEPR Discussion paper No.99-2
Adjusting to a New Technology: Experience and Training
Elhanan Helpman and Antonio Rangel
January 1998 Revised: December 1998

How does the economy react to the arrival of a new major technology? The existing literature on General Purpose Technologies (GPTs) has studied the role that mechanisms like secondary innovations, diffusion, and learning by firms play in the adjustment process. By contrast, we focus on a new mechanism based on the interplay between technological change and human capital accumulation. We show that technological change that requires more education and training, like computerization, necessarily produces an initial slowdown. Surprisingly, however, technological change that lowers the training requirement, like the mover from the artisan shop to the factory, can produce either a bust or a boom. We identify three key properties that determine which effect will occur: 1) the productivity of inexperienced workers; 2) the speed with which experience increases productivity; and 3) the level of general skills required to operate the new technology.

Download this paper (PDF).

SIEPR Discussion paper No. 496
Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices
Peter Blair Henry
September 1997

The decade from 1984 to 1994 witnessed unprecedented emerging stock market liberalizations, as governments from Caracas to Kuala Lumpur opened their equity markets to non-residents for the first time. Emerging market stock prices also boomed during this period. It is tempting to conclude that the stock market openings were responsible for the jump in asset prices, but the wave of openings was concurrent with a period of drastic economic reform. What then, caused the boom? Was it external opening, reform, or both? By constructing an exhaustive list of all major stock market liberalizations and economic reforms occurring in twelve LDCs from 1984 to 1994, I am able to disentangle the effects of stock market opening from the influence of economic reform. The results are striking. The effects of stock market liberalization are at most two thirds as large as suggested by previous work, and economic reforms are an equally important source of asset revaluation.

SIEPR Discussion paper No. 497
Do Stock Market Liberalizations Cause Investment Booms?
Peter Blair Henry
November 1997

Stock market liberalization has a strong positive effect on investment. I document this result for a cross section of emerging markets and show that the relationship holds even when controlling for economic reforms and changes in other fundamental values. There are three principal components to this finding. First, in each of the two years immediately following liberalization, the growth rate of private investment is 10 and 13 percentage points greater than the sample mean respectively. Second, increases in stock market valuation that are caused by liberalization predict larger subsequent increases in the growth rate of investment than generic valuation increases. Finally, in addition to the investment surge it causes by driving up stock prices, liberalization also increases investment through a channel that operates independently of the liberalization-induced increase in valuation. After controlling for stock returns, investment is still 12 percent points higher than the sample mean in the second year after liberalization. The analysis is a natural experiment of the kind proposed by Fisher and Merton (1984) and suggests that stock market liberalization provides a valuable impetus to the economic reform process.

SIEPR Discussion paper No. 489
The Rise of the Middle Class and China's Future Food Deficit
Scott D. Rozelle, Pan A. Yotopoulos, Jikun Huang
 April 1997

 On of the most closely watched debates by researchers on China's food economy addresses the question: Will China be able to produce most of what it needs to feed itself in the 21st century? The preponderance of evidence from research favors the viewpoint that China will essentially be able to feed itself even though future imports of grains will most likely rise. This conclusion, to the extent that it is based on historical data, may not reflect the new pressures on the food economy that emanate from structural changes in China as a result of rapidly rising wealth, urbanization, marketization, and technological change. Notable among the neglected structural factors that change the contours of the demand for food is the graduation of consumers from poverty to the middle class (Yotopoulos, 1985). This has a twofold impact on demand. First, the income elasticity for livestock products is higher than for food grains (which means as income rise, more grain is demanded). Second, the switch in classes, from one with a food grain-based diet (and low consumption of grains) to another with a higher level of consumption of grain-intensive livestock products, also creates a large jump in total demand for grains. The size of the additional demand depends on the number of people who graduate to improved diets and on the difference between the old standard at which they were consuming and the new. While the income elasticity of demand is accounted for in projections, the graduation effect of the switch in classes is often overlooked.

The purpose of this paper is to revisit the debate on the impact of China's development at home and in the world by systematically exploring the implications of China's rapid growth of income, the structure of that income growth (or the pattern of inequality), and the competition of consumers for food and feed. Using a set of structural parameters estimated by the authors from primary and secondary data, a supply and demand modeling framework projects the future balance of China's major grain commodities, while explicitly examining the impact of the new food-feed paradigm. An upward revision of projected demand increases the potential for short-term grain deficits that could lead to abrupt price rises. The concatenation of these events will almost certainly not starve the world; but it is likely to create serious food security problems for those inside and outside China who rely on food markets and who are not in a position to pay high prices for food in the short run.

SIEPR Discussion paper No. 489
The Rise of the Middle Class and China's Future Food Deficit
Scott D. Rozelle, Pan A. Yotopoulos, Jikun Huang
 April 1997

 On of the most closely watched debates by researchers on China's food economy addresses the question: Will China be able to produce most of what it needs to feed itself in the 21st century? The preponderance of evidence from research favors the viewpoint that China will essentially be able to feed itself even though future imports of grains will most likely rise. This conclusion, to the extent that it is based on historical data, may not reflect the new pressures on the food economy that emanate from structural changes in China as a result of rapidly rising wealth, urbanization, marketization, and technological change. Notable among the neglected structural factors that change the contours of the demand for food is the graduation of consumers from poverty to the middle class (Yotopoulos, 1985). This has a twofold impact on demand. First, the income elasticity for livestock products is higher than for food grains (which means as income rise, more grain is demanded). Second, the switch in classes, from one with a food grain-based diet (and low consumption of grains) to another with a higher level of consumption of grain-intensive livestock products, also creates a large jump in total demand for grains. The size of the additional demand depends on the number of people who graduate to improved diets and on the difference between the old standard at which they were consuming and the new. While the income elasticity of demand is accounted for in projections, the graduation effect of the switch in classes is often overlooked.

The purpose of this paper is to revisit the debate on the impact of China's development at home and in the world by systematically exploring the implications of China's rapid growth of income, the structure of that income growth (or the pattern of inequality), and the competition of consumers for food and feed. Using a set of structural parameters estimated by the authors from primary and secondary data, a supply and demand modeling framework projects the future balance of China's major grain commodities, while explicitly examining the impact of the new food-feed paradigm. An upward revision of projected demand increases the potential for short-term grain deficits that could lead to abrupt price rises. The concatenation of these events will almost certainly not starve the world; but it is likely to create serious food security problems for those inside and outside China who rely on food markets and who are not in a position to pay high prices for food in the short run.