Kar, S., Pritchett, L., Roy, S., & Sen, K. (2022). Doing business in a deals world: The doubly false premise of rules reform. Journal of Economic Policy Reform, 25(4), 361-387. https://doi.org/10.1080/17487870.2022.2125391
Abstract: Cross-country data show that structural transformation follows a hump-shaped pattern in manufacturing, with China’s share rising sharply with development while India’s remains subdued at comparable income levels. We develop a three-sector growth model with endogenous accumulation of high- and low-skill human capital and non-homothetic CES preferences over agriculture, manufacturing, and services to account for this divergence. Firms employ the two skill types with sector-specific factor intensities, and households have sector-specific income elasticities. The model maps structural parameters—income elasticities, factor-intensity profiles, and skill-acquisition rates—to the transitional path and the level of the manufacturing peak. We calibrate the model to China and India (1952–2015) by first constructing a measure of baseline human capital growth with constant TFP. Then, we include an exogenous, sector-specific residual TFP growth that supplements human capital growth, and the model reproduces about 70% of the observed change in sectoral value-added shares. Without TFP growth, the human-capital growth mechanism alone accounts for roughly 80% of the reallocation achieved when both channels operate. Additionally, we find that the higher growth rate of human capital among low-skilled workers in China compared to India is a key driver behind the gap.
Optimal Taxation with Debt-financed Capital in an Impoverished Economy link (with Anand Shankar)
Abstract: This paper examines optimal taxation in capital-constrained economies that borrow externally to fund consumption and investment, repaid over a finite horizon via proportional or lump-sum taxes. Under proportional rules, the government front-loads borrowing and maintains flat taxes and consumption—smoothing welfare, while lump-sum taxes achieve first-best capital accumulation and higher long-run welfare. Economies with high consumption elasticity pursue early fiscal austerity and steady capital growth; those with low elasticity prioritize consumption smoothing at the cost of larger initial borrowing. Crucially, extending debt maturity further unlocks welfare gains by tempering tax and consumption volatility, vital for infrastructure-dependent developing countries.
Gold as Preferred Portfolio Choice link (with Anand Shankar)
Abstract: This paper explores the interaction between household preferences, portfolio choices, and the risk premium associated with gold. Using a theoretical framework that incorporates preferences over assets, we analyze how the risk premium and allocation to gold in household wealth are influenced by its dual role as a financial asset and an object of intrinsic value. The findings demonstrate that when households derive utility from gold, such as its use as personal adornment, they accept a lower risk premium and allocate a higher share of wealth to gold compared to settings where such preferences are absent. Using data from 31 countries, 2010–2022, we find qualified support: a stronger revealed preference for gold is associated with significantly lower premia. Effects are most pronounced in economies with incomplete financial markets—such as India—where gold functions as a store of value and hedge. The findings show how cultural preferences affect asset demand and pricing, informing financial-market policy.