CAREER: Networks in General Equilibrium

Firms, industries, and countries form an interconnected network through production, trade, and technological linkages. Any changes in the local economic environment will have ripple effects throughout the network, generating distributional and aggregate consequences. This CAREER award funds research that adopts this network-based view to deepen our understanding of economic growth, capital flow, and industrial policy in an interdependent world. The first project analyzes the network of global capital flows and studies the implication of capital account openness on growth and international convergence. The second project collects new, comprehensive data on input-output tables across countries and analyzes the evolution of production networks as economies grow. The third project studies the incentives and implications of industrial policy when regions engage in economic competition. The fourth project builds a model of global innovation spillovers and analyzes countries' strategic incentives to conduct innovation policy in an interdependent world.

This research develops and applies network models to answer general equilibrium, policy-relevant questions surrounding industrial policy, resource allocation, innovation, and global capital flows. The first project develops a new growth model of the global economy featuring frictional and imperfectly-substitutable flows of goods and capital between countries. The model is suitable for studying the dynamic response of countries around the world to changes in trade and investment frictions. The project applies the model to understand the economic “decoupling” between China and the United States. The second project develops a production network model with a continuum of sectors. The advantage of working with a continuum is that real-world input-output tables, which come with different levels of aggregations, can be seen as discretization of the continuum, thereby making these tables from different countries or time periods directly comparable. The project applies the model to newly collected, comprehensive panel data on input-output tables and analyzes the evolution of production networks across stages of economic development. The third project studies the strategic incentives for local governments to implement industrial policy in a setting where regions are connected through input-output and trade linkages and thus local industrial policy has general equilibrium impact on other regions. Sufficient statistics that capture the local and cross-region spillover effects of industrial policies show that decentralized interventions can backfire if a local government's policy objectives differ from the central planner's. The project applies the model to study decentralized industrial policy and state interventions in China. The fourth project develops a multi-country, multi-sector endogenous growth model with global knowledge spillovers across countries and sectors. The project analyzes the dynamic and global implication of an economy’s innovation policy targeting both the domestic allocation of R&D resources and the barriers to knowledge diffusion across borders. The model provides a quantitative framework to analyze questions in global innovation policy, technological competition, and protectionism relating to intellectual property rights.