Working Papers and Projects

Globalization and the income distribution

Changes in the distribution of income are one of the main challenges to social cohesion in OECD countries. Empirical evidence points to a large share of growth accruing to the top 1% in the income distribution during the last three decades. The role of globalization in this process is hotly debated. As my contribution to this debate I present a theoretical mechanism of how globalization affects the income distribution which has not been studied extensively yet. I build my argument on the Melitz model which I augment by a banking sector to replace the implicit complete financial market in the original paper. The generated rents thus become income-relevant and accrue by assumption to firms' top managers. That allows to assess globalization's effect on the top end of the income distribution. I find globalization having a strong effect on income distribution but do not conclude that reversing globalization is the solution for the challenge to social cohesion. 

Organizational capital, technological choice, and firm productivity

Most theory treats productivity as exogenously given by technological capabilities. Moreover, technology is very often assumed to be freely tradable. It is therefore puzzling to observe the huge differences in productivity as we find in empirical studies even of firms working in the same market environment. To reconcile the heterogeneity, I deviate from a purely technological view and stress the organizational function of a firm. Firms are vehicles to facilitate the division of labor between people with different skills who join forces to produce a particular good. A firm’s management decides about technology jointly with investment projects and changes in the labor force, thereby determining productivity. If a firm is managed well, productivity increases with a larger labor force, because gains from specialization can be exploited. Moreover, as result of the decisions by the management, firms grow over time, shrink or even exit. The growth process is necessarily stochastic, since the future is uncertain and many effects influence the outcome of management’s decisions. Stochastic firm growth, in turn, yields a stationary firm size distribution which reflects large heterogeneity of the firms.

Financial sector in macroeconomic models

I present a macroeconomic model with a financial market with different assets. Interest rates differ for different assets, yet they are not independent from each other because the financial assets are imperfect substitutes from the viewpoint of a saver who wants to shift consumption into the future. Introducing different assets that are not perfect substitutes has at least three advantages. The presented model structure: (i) allows for studying diverting developments in different segments of the financial market, (ii) allows to add financial institutions like commercial and investment banks or even bank systems in the model and, (iii) when opened to other countries, the model allows to separate net from gross capital flows. The perfect arbitrage condition does not apply because various market frictions, which are perceived by the saver, prevent trade in financial assets to fully equalize returns. That frees assets' returns in different sectors from each other.

Institution-building in a decentralized, market-based economy (with Katja Kalkschmied and Manuela Mahecha-Alzate)

Institutions are pervasive and occur in many shapes. They are embodied in rules, norms, organizations and material artifacts. We analyze the most important institutions in market economies: markets and firms.  We use Aoki's (2001) game-theoretic approach to formalize how markets and firms are built, sustained and changed in a decentralized manner by decisions of private parties. Markets and firms are private-order institutions and distinctively different from pragmatic institutions which are outcomes of centralized planning by the state. Yet, the decentralized building of private-order institutions is significantly influenced by the state. We discuss how legislation and specific state interventions can affect private-order institution-building in a decentralized, market-based economy. We further discuss the importance of ideas for state interventions to succeed.