Social capital, barriers to production and capital shares: implications for the importance of parameter heterogeneity from a nonstationary panel approach

Abstract

Technical Abstract: Recent advances in the growth literature have proposed that difficult to quantify concepts such as social capital may play an important role in explaining the degree of persistent income disparity that is observed among countries. Other recently explored possibilities include institutional mechanisms which generate barriers to aggregate production. An important limitation for empirical work in this area stems from the fact that it is difficult to distinguish sources of heterogeneity when direct observations are not available. In this study, we show how developments in the analysis of nonstationary panels can aid in this endeavor. In contrast to traditional dynamic panel data analysis, this approach focuses explicitly on low frequency behavior. Under relatively mild assumptions, the approach can be used to infer properties of aggregate production which are robust to the presence of large classes of unobserved features. In this framework we are able to estimate and test the distribution of production function parameters that would be required in order to generate conditional forecast convergence of per capita incomes even when some of the key factors required to explain growth are unobserved. The results indicate that in order to fully explain the observed persistence in the disparity of per capita incomes, the manner in which unobserved mechanisms influence production must go beyond merely accounting for differences in the trending behavior of aggregate productivity. Specifically, the results demonstrate that if such mechanisms are to be successful empirically, then they must also be able to account for cross country heterogeneity in steady state capital shares. This adds to a growing literature that provides support for models with multiple production regimes. Executive SummaryOne of the challenging tasks facing economists is a more thorough understanding as to why the disparity in national per capita incomes has remained so large across the globe. Most importantly, evidence as to whether or not these disparities are tending to diminish over time is at best mixed. This is despite the fact that many standard economic theories tell us that in an increasingly interconnected global economy, we should expect to see per capita incomes converge, with poorer countries eventually catching up to wealthier countries.Recently economists have conjectured that explanations for the apparent lack of convergence in per capita incomes internationally may lie in the differences among countries that have traditionally received less attention from the economics profession. These include international differences in social and political institutions, differences in social norms and the degree of social cohesion, differences in the levels of education and health care and differences in the degree of social and political openness to new ideas and new technologies. Collectively, these concepts have come to be termed social capital, human capital, and barriers to production. The challenge that these ideas present for...

The long-run determinants of fertility: one century of demographic change 1900–1999

“…However, for this approach to be effective in eliminating or reducing the cross-sectional dependence, the cross-sectional dependence must be driven by a single common source, and the response to the common factor must be the same for all countries (Pedroni 2007). We estimated the DOLS model also with time dummies.…”

“…Specifically, we make two main contributions: first, we apply panel cointegration techniques to data for the period from 1900 to 1999. Panel cointegration estimators are robust under cointegration to a variety of estimation problems that often plague empirical work, including omitted variables and endogeneity (see, e.g., Banerjee 1999;Baltagi and Kao 2000;Pedroni 2007). …”

Private Donations, Government Grants, Commercial Activities, and Fundraising: Cointegration and Causality for NGOs in International Development Cooperation

“…An important feature of these estimators is that they are robust under cointegration to a variety of estimation problems that often plague empirical work, including omitted variables, endogeneity, and measurement errors (Baltagi and Kao, 2000;Pedroni, 2007).…”

Inequality and growth: evidence from panel cointegration

“…However, if there is anything we can take away from the existing literature then, it is the fact that there is no consensus on the question of whether inequality affects growth positively, negatively, or at all. Heterogeneous panel cointegration estimators are robust (under cointegration) to a variety of estimation problems that often plague standard cross-country and panel regressions, including omitted variables, slope heterogeneity, and endogenous regressors [33]. To the best of our knowledge, this is the first paper that applies panel conintegration techniques to the relationship of inequality and growth.…”

“…Heterogeneous panel cointegration estimators are robust (under cointegration) to a variety of estimation problems that often plague empirical work, including omitted variables, slope heterogeneity, and endogenous regressors [33]. Moreover, panel cointegration methods can be implemented with shorter data spans than their time-series counterparts.…”