Correlation in Quantitative Models

Project Outcomes Statement

Technology and efficiency differ across firms, countries and people, and shape important economic outcomes such as living standards and inequality. Further, these differences affect the extent of cooperation between regions as well as the policies countries implement. This research develops new models where the degree of similarity in technology across different agents plays a central role. By establishing a transparent link between observed data and economic theory, this research explores important questions in international economics such as the role of technology transfer and technology creation in the rise and fall of different regions of the world and of different regions within the United States, the role of innovation and international sharing of ideas in determining technological change and a country's growth, and the role of similarity in production techniques in shaping economic policies, more concretely, policies related to international trade, such as increases in import tariffs.

Economists have increasingly turned to quantitative models to assess counterfactual scenarios. A major challenge has been the tradeoff between realism and tractability---stylized models often fail to match key aspects of the data. We introduce tools from probability theory that flexibly accommodates economic theories on the determinants of productivity. Our methodology delivers simple, yet rich, results, which help to resolve the tradeoff between model tractability and empirical realism. Consequently, our research leads to new models that incorporate previously absent features of the data related to the creation and transfer of technology across countries as well as similarity in production techniques across countries. This approach allows to better understand how technological fundamentals shape economic outcomes, such as differences in growth episodes across countries, or regions within a country, the role of knowledge transfer across countries as a source of development, or the reaction of economic agents (consumers, firms) to economic policies.

This research, by providing new modeling tools, creates a unified framework for analyzing questions where technology plays a central role. As such, our approach readily applies to models throughout economics---economic growth, political economy, and urban economics, among others. The tools we introduce have the potential to transform the way researchers and policymakers build and use economic models. Our broad methodological contribution pushes the frontier of knowledge, but it can also influence how policymakers evaluate prospective policies with the potential to create better and more equally shared economic outcomes.

Our research produced four scholarly articles, published (or to-be published) in highly visible academic outlets. We have widely disseminated our research by participating in conferences and seminars at universities and policy-related institutions, giving lectures in several institutions, and teaching these tools in graduate courses ourselves and encouraging others to do the same by making our materials easily available.