We present a theory of ethnic conflict in which coalitions formed along ethnic lines compete for the economy’s resources. The role of ethnicity is to enforce coalition membership: in ethnically homogeneous societies members of the losing coalition can defect to the winners at low cost, and this rules out conflict as an equilibrium outcome. We derive a number of implications of the model relating social, political, and economic indicators such as the incidence of conflict, the distance among ethnic groups, group sizes, income inequality, and expropriable resources.

This paper surveys the empirical literature on the economic geography of trade flows, factor prices, and the location of production. The discussion is structured around the empirical predictions of a canonical theoretical model. We review empirical evidence on the determinants of trade costs and the effects of these costs on trade flows. Geography is a major determinant of factor prices, and access to foreign markets alone is shown to explain some 35% of the cross-country variation in per capita income. The paper documents empirical findings of home market (or magnification) effects, suggesting that imperfectly competitive industries are drawn more than proportionately to locations with good market access. Sub-national evidence establishes the presence of industrial clustering, and we examine the roles played by product market linkages to customer and supplier firms, knowledge spillovers, and labour market externalities. This paper was produced as part of the Centre’s Globalisation Programme

This paper estimates a structural model of economic geography using cross-country data on per capita income, bilateral trade, and the relative price of manufacturing goods. More than 70% of the variation in per capita income can be explained by the geography of access to markets and to sources of supply of intermediate inputs. These results are robust to the inclusion of other geographical, social, and institutional characteristics. The estimated coefficients are consistent with plausible values for the structural parameters of the model. We find quantitatively important effects of distance, access to the coast, and openness on levels of per capita income.

We develop a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency. Several types of evidence – including human readings of 12,000 newspaper articles – indicate that our index proxies for movements in policy-related economic uncertainty. Our US index spikes near tight presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 debt-ceiling dispute and other major battles over fiscal policy. Using firm-level data, we find that policy uncertainty raises stock price volatility and reduces investment and employment in policy-sensitive sectors like defense, healthcare, and infrastructure construction. At the macro level, policy uncertainty innovations foreshadow declines in investment, output, and employment in the United States and, in a panel VAR setting, for 12 major economies. Extending our US index back to 1900, EPU rose dramatically in the 1930s (from late 1931) and has drifted upwards since the 1960s.

I set out a new method for estimating true (Konüs) PPPs. Household consumption per head deflated by these PPPs answers the question: by how much must the average expenditure per head of poor country A be increased to enable the typical inhabitant of A to enjoy the same utility level as the typical inhabitant of rich country B? Conventional multilateral PPPs for household consumption, such as the ones published by the World Bank, are not based explicitly on economic theory. So it is not clear that they can answer the question above, particularly if consumer demand is not homothetic. And there is overwhelming empirical evidence against homotheticity. The estimates of the standard of living in this paper are based on the economic theory of consumer demand. The main tool is the expenditure function. It turns out that it is not ne cessary to estimate all the parameters of the expenditure function but only the relatively small number which measure the consumer’s response to income changes. This makes the method feasible even when there are large numbers of products. The method is applied to 141 countries included in the World Bank’s 2005 International Comparison Program, at the level of 100 products. The results give strong support for nonhomotheticity and also for the importance of background factors such as climate...

We develop a diagrammatic framework that can be used to study the economic linkages between regions or cities. Hitherto, such linkages have not been the primary focus of either the theoretical or empirical literatures. We show that our general framework can be used to interpret both the New Economic Geography and Urban Systems literatures to help us understand spatial economic linkages. We then extend the theoretical framework to allow us to consider a number of additional issues which may be particularly important for analyzing the impact of policy. Such policy analysis will also require empirical work to identify the nature of key relationships. In a final section, we consider what the existing empirical literature can tell us about these relationships.

This paper presents a model of social learning about the suitability of local conditions for new business ventures and explores its implications for the microeconomic patterns of economic development. I show that: i) firms tend to ‘rush’ into business ventures with which other firms have had surprising success thus causing development to be ‘lumpy’; ii) sufficient business confidence is crucial for fostering economic growth; iii) development may involve wave-like patterns of growth where successive business ventures are first pursued and then given up; iv) there is, nevertheless, no guarantee that firms pursue the best venture even in the long-run.

'I propose here the view that, when the market fails to achieve an optimal state, society will, to some extent at least, recognize the gap, and nonmarket social institutions will arise attempting to bridge it....' (Kenneth Arrow 1963, p. 947). 'Economic theorists traditionally banish discussions of information to footnotes. Serious consideration of costs of communication, imperfect knowledge ... would, it is believed, complicate without informing.... [T]his comforting myth is false. Some of the most important conclusions of economic theory are not robust to considerations of imperfect information' (Michael Rothschild and Joseph Stiglitz 1976, p. 629). 'That any sane nation, having observed that you could provide for the supply of bread by giving bakers a pecuniary interest in baking for you, should go on to give a surgeon a pecuniary interest in cutting off your leg, is enough to make one despair of political humanity' (George Bernard Shaw, The Doctor's Dilemma, 1911).

Economists have a well-developed theory of value but the theory of why people hold the values they do is rudimentary at best. In spite of the fact that it is common to argue that values are important, most work on values is normative and the positive theory of values is relatively under- developed. In this paper we propose a simple yet general way to think about values – they are about how one trades-off one own’s utility against that of others – and argue that we can draw on the large literature on pro-social behavior for hypotheses on how people will choose values. Then, using data from the UK’s Citizenship Survey we show how models of self-interest, fairness, reciprocity and identity, can explain many of the patterns that we observe in the data across a wide variety of values.

This paper sets out a general algorithm for calculating true cost-of-living indices or true producer price indices when demand is not homothetic, i.e. when not all expenditure elasticities are equal to one. In principle, economic theory tells us how we should calculate a true cost-of-living index or Konüs price index: first estimate the consumer's expenditure function (cost function) econometrically and then calculate the Konüs price index directly from that. Unfortunately this is impossible in practice since real life consumer (producer) price indices contain hundreds of components, which means that there are many more parameters than observations. Index number theory has solved this problem, at least when demand is homothetic (all income elasticities equal to one). Superlative index numbers are second order approximations to any acceptable expenditure (cost) function. These index numbers require data only on prices and quantities over the time period or cross section under study. Unfortunately, there is overwhelming evidence that consumer demand is not homothetic (Engel's Law). The purpose of the present paper is to set out a general algorithm for the nonhomothetic case. The solution is to construct a chain index number using compensated...

Using detailed product-level export data for China and a variant of the Antràs and Helpman (2004) model that includes investments in component search, we examine the sectoral determinants of foreign direct investment (FDI) versus foreign outsourcing in export processing trade. We exploit the coexistence of two regulatory export processing regimes in China, which specify who owns and controls the imported components for export processing. We find that in the regime that Chinese plants own the imported components, the share of exports from vertically integrated plants is increasing in the intensity of headquarter inputs across sectors, and is decreasing in the contractibility of inputs. These results are consistent with the property- rights theory of intra-firm trade. However, in the regime that foreign firms own the imported components, no significant relationship is found between the prevalence of vertical integration, headquarter intensity and input contractibility across sectors. The positive relationship between productivity dispersion and the export share of integrated plants across sectors, as suggested by the existing literature, is found only in the regime that foreign firms own the imported components. These results are consistent with our model...

We study long-run trends in market hours of work and employment shifts across economic sectors driven by uneven TFP growth in market and home production. We focus on the structural transformation between agriculture, manufacturing and services and on the marketization of home production. The model can rationalize the observed falling or Ushaped pattern for aggregate hours, the shift from agriculture to services and balanced aggregate growth. We find support for the model’s predictions in long-run US data.

We study long-run trends in aggregate market hours of work and shifts across economic sectors within the context of balanced aggregate growth. We show that a model of many goods and uneven TFP growth in market and home production can rationalize the observed falling or U-shaped aggregate hours and structural change across market sectors. The dynamics of market hours are driven by substitutions between home and market production and depend critically on the existence of many market sectors. Extensions show how the model can explain rising leisure and more complex hours dynamics without violating balanced aggregate growth.

The development of David Ricardo’s economic theory of distribution - the laws that determine the share of output between the economic classes - depended on specific connections at several levels between two practical sciences of the early 19th century, namely experimental agriculture and political economy. This paper shows how Ricardo, one of the foremost British economists of his day, combined his empirical knowledge of farming and agricultural experiments to develop both the content and method of Classical economics. The method of argument he developed depended upon numerical experiments that mirrored, in form and experience, the experimental accounts from agricultural science. The content of his arguments, and his derivation of the laws of distribution, depended critically on the effect of increased labour input into agriculture. This apparently hypothetical case was in fact a real question of political economy addressed by farming experiments within the context of the contemporary “spadehusbandry” debate.

Subjective wellbeing data is becoming increasingly popular in economics research. The wellbeing valuation approach uses wellbeing data instead of data gleaned from preferences to attach monetary values to non-market goods. This method could be an important alternative to preference-based valuation methods such as contingent valuation, but there are a number of significant technical deficiencies with the current methodology. It is argued that the current method derives biased estimates of the value of non-market goods. The paper presents Three-Stage Wellbeing Valuation, a new approach to valuation using subjective wellbeing data that solves for the main technical problems and as a result derives estimates of welfare change and value that are consistent with welfare economic theory. As an example, I derive robust values associated with unemployment using the new approach and compare these to biased values derived from the standard wellbeing valuation method. Values derived from Three-Stage Wellbeing Valuation can be used in cost-benefit analysis.

The convergence hypothesis has generated a huge empirical literature: this paper critically reviews some of the earlier key ndings, claries their implications, and relates them to more recent results. Particular atten- tion is devoted to interpreting convergence empirics. The main ndings are: (1) The much-heralded uniform 2% rate of convergence could arise for reasons unrelated to the dynamics of economic growth. (2) Usual empirical analyses|cross-section (conditional) convergence regressions, time series modelling, panel data analysis|can be misleading for under- standing convergence; a model of polarization in economic growth clarifies those difficultles. (3) The data, more revealingly modelled, show persis- tence and immobility across countries: some evidence supports Baumol's idea of \convergence clubs"; some evidence shows the poor getting poorer, and the rich richer, with the middle class vanishing. (4) Convergence, un- ambiguous up to sampling error, is observed across US states.

This paper reviews the cross-country record of economic growth, using as organizing framework how economic theory has guided that empirical analysis. The paper argues that recent studies of economic growth—both empirical and theoretical—distinguish from previous work in three distinct ways:1. An explicit focus on cross-country growth and development experiences; 2. Improved, more extensive cross-country data; 3. A heightened need, driven by real-world topicality, for understanding the role of knowledge and technology in economic growth.

Can the increasing significance of knowledge-products in national income - the growing weightless economy - influence economic development? Those technologies reduce ''distance'' between consumers and knowledge production. This paper analyzes a model embodying such a reduction. The model shows how demand-side attributes - consumer attitudes on complex goods; training, education, and skills for consumption (rather than production) - can importantly affect patterns of economic growth and development. Evidence from the failed Industrial Revolution in 14th-century China illustrates the empirical relevance of the analysis.

During periods of strong economic growth, migration is and has always been important for filling gaps in the labour market. On balance, the evidence for the UK labour market suggests that fears about the consequences of rising immigration have been exaggerated. It is hard to find evidence of much displacement of UK workers or lower wages, on average. Immigrants, especially in recent years, tend to be younger and better educated than the UK-born and are less likely to be unemployed. They certainly do not receive preferential access to housing. But there have been some effects. The less skilled may have experienced greater downward pressure on wages and greater competition for jobs than others, but these effects still appear to have been modest. Unfortunately we do not know much about whether the effects of immigration are different in downturns. We also need to understand more about how capital and sectoral shifts in demand respond to immigration over the longer run. Future migration trends will, as ever, depend on relative economic performance and opportunity. But we still need to know more about the effects of rising immigration beyond the labour market in areas like prices, housing, health, crime and welfare.

This thesis consists of three essays, all of which use the tools of economic theory to analyze specific situations in which multiple strategic agents interact with each other. The first chapter studies the strategic transmission of information between an informed expert and a decision maker when the latter has access to imperfect private information relevant to the decision. The main insight of the paper is that the access to private information of the decision maker hampers the incentives of the expert to communicate. Surprisingly, in a wide range of environments, the decision maker's information cannot make up for the loss of communication and the welfare of both agents diminishes. The second chapter presents a model of electoral competition between an in- cumbent and a challenger in which the voters receive more information about the quality of the incumbent. If the incumbent can manipulate the information received by the voters through costly effort, the model predicts an incumbency advantage, even though the two candidates are drawn from identical symmetric distributions, and the voters have rational expectations. It is also shown that a supermajority re-election rule improves welfare, mainly through discouraging low-quality politicians from manipulating the information. Finally the third chapter uses a mechanism design approach to characterize the class of social choice functions which cannot be profitably manipulated...