We develop a dynamic growth model where physical and social technologies co-evolve to jointly determine economic performance and well-being. Building on Richard R. Nelson's foundational insights, we conceptualize social technologies (encompassing institutions, norms, and governance) as direct inputs to both the production function and the representative agent's utility function. The model features an agent who maximizes intertemp oral utility by allocating investment between these two forms of capital. The resulting system of differential equations is fundamentally nonlinear, driven by a critical threshold in institutional quality below which returns to social investment are negligible. Our central theoretical prediction, confirmed through numerical simulations, is the existence of multiple long-run equilibria: a robust, self-perpetuating poverty trap characterized by institutional failure, and a saddle-point prosperity equilibrium. Stability analysis reveals a profound asymmetry: the poverty trap is a stable node, while the prosperity equilibrium is a saddle point, meaning only trajectories on its one-dimensional stable manifold converge to sustained prosperity. The model's global dynamics, illustrated through basins of attraction, demonstrate strong path dependence and provide a unified explanation for the persistent divergence in development outcomes. Policy implications underscore the primacy of institutional investment and the necessity of coordinated interventions to shift economies out of development traps.
This paper investigates how structural transformation influences long-run economic growth in the era of service-sector dominance. We develop a twosector Solow model in which learning-by-doing enhances industrial productivity while service productivity remains stagnant. Using panel data for 183 countries from 1961 to 2019, we find that a one-percentage-point increase in the industrial share of value added raises per capita GDP growth by 0.026 percentage points. Mechanism analyses show that industrialization accelerates productivity, raises interest rates, and improves labor efficiency. The growth effects are stronger in richer economies, countries with smaller labor forces, and those with lower agricultural employment. These results indicate that industrial development remains essential for sustaining long-run growth and productivity convergence, even as economies transition toward services. The study bridges classical structural transformation theory with modern empirical evidence, offering new insights into post-industrial growth dynamics.
This paper analyzes China's economic marketization since 1978. We provide a historical account showing its success resulted from gradualism and a trial-and-error process. We then develop a two-sector Ramsey model where an "experimental sector" with an unknown decentralized production process represents reforms. A central planner learns from this sector's revealed productivity, explaining China's smooth transition from a planned to a market-oriented economy through an information-learning process.
This article reports that after controlling the effect of the long-term real interest rate and extending forecasting horizons beyond the typical 3 months to 3 or 4 years found in most existing studies, I find that the rent-price ratio is significantly related to both the expected rent growth and price growth over five- to six-year horizons. The expected future price growth is more sensitive than the expected rent growth to each of the two predictors. The differences in the sensitivities are consistent with the mean reversion property of the rentprice ratio and the positive relationship between the current interest rate and the future rent-price ratio. The increasing predictive power for longer horizons is consistent with the implications of a vector autoregressive model for the two predictors that are highly persistent and interacting with each other.
This paper embeds the republican spirit of innovism - dignity for ordinary people, liberty of entry and speech, and fair reward - into a modern ideasbased growth model to explain the Great Enrichment. Innovism is treated as a produced, nonrival social technology that multiplies production and raises the effectiveness of research, reconciling economic history with a semi-endogenous Jones framework. Small, persistent gains in civic permission and legal predictability sustain the frontier's one-to-two percent per-capita growth as demographics slow, while backsliding lowers the slope. The model yields transparent balanced-growth conditions, ties adjudication and entry reforms to capital deepening, and shows how open science enhances research productivity.
This paper presents a simple model demonstrating how digitalization drives inter-industry resource reallocation, shifting from low digital-intensive industries to high digital-intensive industries. While digitalization substitutes workers, it also lowers productivity thresholds, enabling less productive firms to overcome entry barriers, thereby increasing sectoral employment - a phenomenon more pronounced in high digital-intensive sectors. Consequently, digitalization might raise employment in high digital-intensive sectors without contributing to sectoral wage inequality. Empirical testing of Taiwan's city-level data from 2001 to 2019 supports our predictions, showing that both digitalization and digital infrastructure are associated with increased firm turnover, higher employment, elevated wages, and reduced wage inequality.
We study the design of fiscal policy within a two-period model involving a central government and multiple regions that differ in the privately observable durability of their local intergenerational public goods (IPG). The IPG is financed through local debt and fiscal transfers, and the regions are less patient than the central government. We address the joint frictions of asymmetric information and present bias. We find that regions with greater durability should be allocated higher levels of debt issuance, regardless of the presence of informational friction. Regarding the endogenous interaction between these two fiscal policies, our analysis indicates that, with a power utility function, debt issuance and fiscal transfers function as complementary tools in the firstbest optimum. However, when accounting for these two frictions, resources should be transferred from regions with higher durability to those with lower durability, suggesting that debt issuance and fiscal transfers act as substitutes in restoring social optimality.
This study investigates the role of emotional dynamics as captured by the Fear and Greed Index in explaining stock price jumps in the S&P 500. We focus on two distinct episodes: the aftermath of the 2016 U.S. presidential election and the early months of President Donald Trump's second term in 2025. Our findings reveal that during Trump's first term, stock price jumps were associated with oscillations between extreme fear and greed, creating short-term trading opportunities. In contrast, early in Trump's second term, extreme fear was the primary emotional driver of market jumps, that can be interpreted as herding behavior.
This paper documents the significant impact of local and external economic policy uncertainty (EPU) on China's information environment. Specifically, during periods of high local uncertainty, analyst earnings forecast accuracy declines, while analyst dispersion and coverage increase. Both analyst upgrade and downgrade recommendations decrease during such periods. External policy uncertainty exerts significant, though varying, cross-country effects on Chinese analysts' behaviors. Time-series analyses reveal that several key economic, political, and market events or reforms notably influence the impact of EPU on analyst behaviors in China. In particular, sentiment mitigates the impact of EPU on analyst accuracy, disperiosn, and coverage.
We study the effects of model uncertainty on investment, financing, and risk management for innovative firms. The main results are as follows: (1) Innovation investment can increase firm value and elevate the firm's liquidity demand; (2) Stronger ambiguity aversion towards model uncertainty reduces the innovative firm's liquidity demand, firm value, and payout boundary; (3) As the degree of ambiguity aversion increases, innovative firms become more inclined to pay cash in advance and reduce external financing; (4) Ambiguityaverse innovative firms tend to hedge more than non-ambiguity-averse firms.
In this note, we introduce increasing returns to Bovenberg and Mooij's (1994) model as generalised in Fullerton (1997) and use an example to show that (1) even with a distortionary labor tax, the optimal environmental levy is greater than the Pigouvian rate; (2) the difference between tax on the dirty good and the clean good is also greater than the Pigouvian tax; (3) under certain circumstances, the government can optimally use the environmental levy to both meet its revenue requirement and subsidize the clean goods with increasing returns.
