Closing the US-EU productivity gap

Ana Rincon Aznar, Anastasios Saraidaris, Michela Vecchi, Francesco Venturini, 24 April 2014

The importance of innovation activities for productivity growth has long been recognised. However, there are significant differences in the level of intangible investments across developed economies. This column describes how the EU can enhance its productivity growth and close the gap with the US. One such main channel is through investing in intangible assets and absorptive capacity. A second one is increasing production efficiency. Relevant policy recommendations are also discussed.

Human capital and income inequality

Amparo Castelló-Climent, Rafael Doménech, 23 April 2014

Most developing countries have made a great effort to eradicate illiteracy. As a result, the inequality in the distribution of education has been reduced by more than half from 1950 to 2010. However, inequality in the distribution of income has hardly changed. This column presents evidence from a new dataset on human capital inequality. The authors find that increasing returns to education, globalisation, and skill-biased technological change can explain why the fall in human capital inequality has not been sufficient to reduce income inequality.

Persistent noise trading and market meltdowns

Giovanni Cespa, Xavier Vives, 22 April 2014

Since capital flows to and from hedge funds are strongly related to past performance, an exogenous liquidity shock can trigger a vicious cycle of outflows and declining performance. Therefore, ‘noise’ trades – usually thought of as erratic – may in fact be persistent. Based on recent research, this column argues that there can be multiple equilibria with different levels of liquidity and informational efficiency, and that the high-information equilibrium is unstable. The model provides a lens through which to interpret the ‘Quant Meltdown’ of August 2007 and the recent financial crisis.

A European mobility assistance scheme

Tito Boeri, Herbert Brücker, 22 April 2014

Migration from new member states to richer countries within the EU has raised concerns that immigrants tend to abuse the welfare state. This column argues that this is not the case, and suggests the construction of a mobility assistance scheme. This scheme should be financed by the EU itself, and it would allow immigrants to receive welfare benefits in the country they have paid taxes. Such a program would not hamper mobility or distort the incentives of immigrants. It would also have important political side effects.

Microentrepreneurial reinvestments: Evidence from Tanzania

Thorsten Beck, Haki Pamuk, Burak Uras, 21 April 2014

A recent literature shows that access to formal savings devices improves entrepreneurial outcomes in developing economies. This column presents research comparing the effect of saving in formal accounts with alternative, less formal measures. Findings suggest that entrepreneurs use formal saving to insulate themselves from household consumption commitments.

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