Women`s Liberation as a Financial Innovation
Transcription
Women`s Liberation as a Financial Innovation
Women’s Liberation as a Financial Innovation∗ Moshe Hazan David Weiss Hosny Zoabi Tel Aviv University and CEPR Tel Aviv University The New Economic School April 2015 Preliminary and Incomplete Abstract Over the course of the second half of the 19th century, states in the US, which were entirely dominated by men, gave married women property rights. Before this ”women’s liberation”, married women were subject to the laws of coverture. Coverture had detailed laws as to which spouse had ownership and control over various aspects of property both before and after marriage. This paper develops a general equilibrium model with endogenous determination of women’s rights in which these laws affect portfolio choices, leading to inefficient allocations. We show how technological advancement eventually leads to men granting rights, and in turn how these rights affect development. We show how key implications of the model are consistent with cross-state empirical evidence in the US. Specifically, the dynamics of nonagricultural employment both after and before rights are granted fit exactly with the model’s prediction. ∗ We thank Yannay Shanan and Alexey Khazanov for excellent research assistance. Hazan: Eitan Berglas School of Economics, Tel Aviv University, P.O. Box 39040, Tel Aviv 69978, Israel. e-mail: [email protected]. Weiss: Eitan Berglas School of Economics, Tel Aviv University, P.O. Box 39040, Tel Aviv 69978, Israel. e-mail: [email protected]. Zoabi: The New Economic School, 100 Novaya Street, Skolkovo Village, The Urals Business Center, Moscow, Russian Federation. e-mail: [email protected]. 1 Introduction Over the course of the second half of the 19th century, states in the US, which were entirely dominated by men, gave married women property rights, while England granted similar rights in 1870. Before this ”women’s liberation”, married women were subject to the laws of coverture.1 Coverture had two aspects. First, in the eyes of the law, husband and wife were the same person. Second, there were detailed laws as to which spouse had ownership and control over various aspects of property both before and after marriage. This paper focuses on the second aspect of coverture, property laws, in developing a theory as to why men gave women rights. Property was divided into multiple types. Personal property, including money, stocks, furniture and livestock, became the husbands property entirely. He could sell or give the property away, and even bequeath it to others. There was a limitation on this freedom to paraphernalia, which was personal property such as clothing and jewelry, which the husband could sell or give away, but not bequeath. Real assets, such as land and real estate, became under the husbands partial control. He could manage the assets as he saw fit, including the income generated by the assets, but he could not sell or bequeath the property without his wife’s consent.2 We argue that these laws influenced the investment portfolio choices women made, and also had the effect of distorting capital markets, and thus allocations. Women investing predominantly in real assets, such as land, rather than moveable assets, such as capital, led to a misallocation between the associated sectors 1 Coverture was an inherent aspect of British common law, and as such applied both in England and her colonies, including those that formed the United States. The property aspects of these laws were undone over the course of the 19th century in both England and America. Note that Canada and Australia also saw women’s rights greatly expanded in this period, though we do not focus on their experiences in this paper. 2 See Combs (2005) for a description of these rights. For an excellent description of the general responsibilities husbands and wives had to one another under coverture, see Basch (1982) Tables 1 and 2. 1 of the economy.3 As the productivity of capital-intensive industries, such as railroads, grew the effects of this factor misallocation became worse.4 Eventually, these distortions were significant enough for men to want to give women rights.5 We develop a model in order to study men’s incentive to give women property rights in the context of financial market efficiency.6 In the model, men have utility defined over their own consumption and the bequest they leave to their children. These in turn are determined by overall household income and the man’s bargaining power in the household. Bargain3 The notion that women’s property laws affected portfolio choices is grounded in historical evidence. Combs (2005) finds that these laws induced women to hold their wealth strategically, and that portfolios changed after rights were granted. In her sample of British shopkeepers wives, those who were subject to coverture and not subject to coverture had nearly the same total amount of assets, but their portfolio composition was dramatically different. She exploits the fact that when rights were granted in 1870 to married women, they were not granted retroactively. Combs thus studies the difference in portfolios of women who died at the same time but had married either before or after the reform. Women with rights had half as much money in real assets having nearly twice the amount in personal property. Clearly, the effects of coverture on portfolio allocations were dramatic. 4 Maltby, Rutterford, Green, Ainscough, and van Mourik (2011) note two interesting facts about railroads in England, which was clearly a capital-intensive industry. First, between 1853 and 1914, railroad stocks rose dramatically to represent roughly 40% of dividend and interest paying assets traded in London, representing the national portfolio (pg 161-162). Furthermore, there was a great democratization of the stock market over this time period, as “In the years between the 1840s and 1914, there was a transformation of the composition of both investments and the investing public. No longer were investors confined to a wealthy elite largely located in London, for they were increasingly found throughout the country and among the middle classes.” (pg 156). In particular, it is estimated that between 150,000 and 300,000 people held stock in British railways by 1886 (pg 163). It is hard to imagine that the railroad industry would have been as successful without the overall deepening of financial markets over this time period. 5 We argue that it was no coincidence that property rights were given in England in the middle of a period of massive capital market development. For instance, Maltby, Rutterford, Green, Ainscough, and van Mourik (2011) argues that there was “an enormous expansion in the volume and variety of securities available to the investing public, especially from the 1860s onwards. Between 1870 and 1913, new issues on the London capital market, for example, totaled 5.7 billion pounds and among them were an increasing number of shares from the likes of British industrial and commercial companies and foreign mines and plantations.” (pg 161). 6 One possible criticism of the idea that women’s property rights were important for aggregate outcomes is the notion that perhaps women didn’t have much in the way of assets. Married women’s labor force participation was low, even after rights were granted, so where would they have the money to invest? We note that bequests were a major source of wealth in this period, as in DeLong (2003). As such, all we need to assume is that parents bequeathed assets appropriate to their children in order for the distortions to exist. Specifically, as long as parents internalize that their bequest to their daughter will be taken from her unless it’s in the form of land, the claims of this paper stand. 2 ing power depend on the relative income of the spouses both from the labor market and from assets.7 Before marrying, individuals make their portfolio choice with women potentially underinvesting in capital when they do not have rights.8 Thus, when deciding whether to grant women rights, men face a tradeoff. On one hand, granting rights may increase overall output, and thus household income, while on the other hand, granting rights reduces men’s bargaining power within the household, reducing their share of household income.9 We model two different sectors; agriculture, which uses land, and manufacturing, which uses capital. As technology in manufacturing increases, the demand for capital grows and the effect on factor misallocation becomes worse. One prediction of the model is that higher levels of industrialization are associated with giving women property rights. The model is a general equilibrium model with endogenous determination of women’s rights. After solving the model, we present a numerical example in order to illustrate how the model works. This exercise clearly shows the tradeoff men face when considering granting rights. On one hand, if they grant rights, total household income goes up.10 On the other hand, granting women rights reduces men’s bar7 Combs (2006) argues that, after property rights were given, women had higher fraction of household wealth, invested more in ’moveable property’ despite returns decreasing in that area, and perhaps received transfer from husband due to bargaining power. 8 This is equivalent to men and women bargaining before marriage and portfolio choices, subject to the constraint of no commitment on the men’s side to implement any promises. 9 Although couples bargain in a cooperative way, the model leads to Pareto inefficient decision on the women’s part, and a corresponding undersupply of capital. This noncooperative ingredient is reminiscent of Basu (2006), who finds that when the threat points depend in part on endogenous decisions, multiple equilibria may exist. The nature of our model, however, is different from that of Basu (2006). In that paper, all decisions are made in the same period. In contrast, our models assumes two periods, and the inefficiency is dynamic in the sense that it is due to the initial underinvestment in capital in the first period caused by expectations of behavior in the second period, rather than any inefficiency in the second period. In this respect, our model is close to Konrad and Lommerud (1995) who assume a two-period model where individuals invest first in education, then marry. 10 Our mechanism depends on women investing more of their assets in capital when they have rights, which reduces spreads in the returns of assets, and thus increases efficiency. Acemoglu and Zilibotti (1997) argue that financial market development allowed for greater diversification of risk and higher productivity. Granting women property would allow for the same mechanism: greater capital investment allows for more diversification and higher productivity. Incorporat- 3 gaining power within the household. Furthermore, we are able to study how coverture affects the dynamics of the economy, with a focus on the interaction between capital accumulation, the rate of return of capital, and the level of financial distortion in the economy. We discuss how men’s incentive to give women property rights evolves over the course of economic development, and how these rights in turn affect development. Thus, this paper is connected to a growing literature on both how development affects women’s empowerment and how women’s empowerment affects development.11 We estimate the dynamic effects of the change in laws on non-agricultural employment in order to confirm three of the model predictions with empirical evidence. Using U.S. data and cross-state variation in the granting of married women’s property rights, we show that: (i) When rights were granted, there was a discrete increase in the fraction of workers in the non-agricultural sector; (ii) The effects on the non-agricultural sector grew at a diminishing rate after rights were granted; (iii) Prior to rights being granted, the fraction of workers in non-agriculture grew at a concave rate. These facts jointly suggest that granting women rights allowed for greater growth of the non-agricultural sector.12 People were aware of the financial market implications of women’s rights when these rights were granted. Chused (1985) argues that “It is now generally agreed that the first wave of married women’s acts were adopted in part because of the dislocations caused by the Panic of 1837.”, implying that the financial maring their model into our own would allow for yet another mechanism through which women’s property rights affects growth. 11 For more on this topic, see Doepke and Tertilt (2014). 12 Geddes and Lueck (2002) show that states with a greater fraction of the population in cities, higher wealth, and more educated women were more likely to enact married women’s property rights laws. States that were more urbanized, and thus likely to be more industrialized, with more wealth likely experienced greater distortions due to misallocation of assets under coverture, which also goes along with our hypothesis. Khan (1996) shows that granting women property rights led to increased involvement of women in commercial activity, as measured by patent records. While we argue that property rights increased efficiency in the financial markets, the idea that rights also increased research and development is clearly complementary to the story we present in this paper. 4 ket implications of women’s rights were indeed a cause of reform.13 Lawmakers at the time were also aware of the implications. Thomas Herrtell, of the New York Legislature, argued that women’s property rights “would open appropriate segments of the economy to women, reduce pauperism, and thereby save the public considerable expense.” Basch (1982) pg 115. Furthermore, Combs (2013) argues that trusts established for women during coverture allowed for women to protect their husbands assets during bankruptcy, effectively committing sophisticated fraud, and shows that people were mindful of these realities during the debate over granting property rights.14 The historical evidence fits well with our argument that men were aware that giving women rights would improve capital markets and general allocations. There is a growing literature on why men gave women rights in the 19th century. Doepke and Tertilt (2009) argue that men faced a tradeoff between wanting their own wives to have no power, and other men’s wives to have power, and thus increase investment in human capital.15 Fern´andez (2014) argues that men faced a tradeoff between not wanting their own wives to have any rights and wanting to be able to leave a bequest for their daughters. This paper adds to this literature in three ways. First, we propose a novel complementary mechanism through which men choose to give women rights, which does not depend on the desire to help their daughters. While men are altruistic towards their children, they are selfish in the sense that they permit women’s rights in order to maximize their own consumption. Second, the story we propose is based on the details of 13 This notion is further reflected in Basch (1982) “It is worth noting that the two major statutes of 1848 and 1860 followed the depressions of 1839-43 and 1857” (page 122). 14 Chused (1985) argues the same occurred in Oregon, showing that the same phenomenon was present in the United States. Notice that this story of property rights reducing fraud is a complementary mechanism to our own as to how granting married women property rights would be a financial innovation that improves capital markets. 15 Doepke and Tertilt (2009) use the growing importance of human capital as their trigger through which men eventually give women rights. Galor and Moav (2006) study the interaction between physical and human capital complementaries and development. Our paper shows how women’s rights affect physical capital accumulation, which in turn affect the returns to human capital, as in Galor and Moav (2006), and thus feedback into the story presented in Doepke and Tertilt (2009). 5 the property rights given and how the legal regime that existed prior to these rights distorted capital markets. Finally, our story is consistent with several facts in the data, including the dramatic change in portfolio choices and the dynamics of industrialization as discussed above. We proceed as follows. Section 2 develops the model. In Section 3 we solve the model, define equilibrium, and outline the intuition for various stages of development. Section 4 outlines the solution methodology for numerically solving the model and discusses the results of the numerical exercise. Section 5 presents the cross-state empirical evidence. We conclude in Section 6. 2 Model The economy consists of overlapping generations of men and women who live for two periods. In every period the economy produces a single homogeneous final good that can be used for consumption and investment. There are two different assets: Land, T , and capital, K.16 The final good is produced by two intermediate goods: agriculture, A, and manufactured goods, M . While agriculture uses labor and land, manufacture utilizes labor and capital as factors of production. We assume the both assets fully depreciate within a period.17 16 Land corresponds to the ’real’ assets over which married women always had partial rights to, while capital represents the ’moveable’ assets that immediately and forever became the husband’s property upon marriage. We maintain the interpretation that women are investing in land, rather than all real estate such as commercial buildings, by assuming that the financing of commercial buildings required complex financial instruments such as stocks. These stocks would have been taken over by the husband upon marriage. So while technically, commercial real estate should appear in women’s portfolio choice, practically we believe this assumption to be valid. 17 As will be clear below, the assumption of full depreciation is not necessary for our analytic results. Rather, it simplifies the solution by allowing us to abstract from relative changes of asset prices over time and the corresponding implication for portfolio choice of households. 6 2.1 Production Production takes place in three different sectors: the final good sector, the agricultural sector, and the manufacturing sector. 2.1.1 The Final Good The output of the final good in the economy in period t, Yt , is given by aggregating the agricultural intermediate good, YtA , and the manufacturing intermediate good, YtM , according to the following neoclassical constant elasticity of substitution (CES) production technology: (1/ρ) Yt = (YtA )ρ + (YtM )ρ , (1) where ρ ∈ (0, 1).18 2.1.2 The Agricultural Intermediate Good Production of the agricultural intermediate good occurs within a period according to a neoclassical, CRS, Cobb-Douglas production technology, using labor and land. The output produced at time t, YtA , is α A (1−α) YtA = AA , t (Tt ) (Lt ) (2) A where AA t is the level of technology in the agricultural sector, Tt and Lt are the land and the number of workers, respectively, employed by the agricultural sector in period t, and α ∈ (0, 1) is the weight on land. Notice that the amount of land in the economy is not fixed. This is to capture the fact that real estate includes buildings, including commercial buildings, which are not fixed in supply. 18 The implicit assumption here is that manufacturing goods and agriculture goods are gross substitutes, rather than complements. This allows for structural transformation away from the agricultural sector over the process of development, in line with historical data. For further discussion on modeling structural transformation, see Herrendorf, Rogerson, and Valentinyi (2014). 7 2.1.3 The Manufacturing Intermediate Good Production of the manufacturing intermediate good occurs within a period according to a neoclassical CRS Cobb-Douglas production technology using labor and moveable asset. The output produced at time t, YtM , is α M (1−α) YtM = AM , t (Kt ) (Lt ) (3) M where AM T is the level of technology in the manufacturing sector, and Kt and Lt are the capital stock and the number of workers, respectively, employed by the manufacturing sector in period t.19 2.2 Individuals In every period a generation, consisting of a unit measure of men and of women, is born. Individuals live for two periods, childhood and adulthood. Children make no decisions. Adults receive bequest from their parents, bt−1 , and then the men decide whether to grant women property rights. Single men and women then invest their bequest in land and capital. After the investment decision, they form households and decide on consumption for each spouse, along with a bequest for the next generation. We assume that the man supplies his one unit of time inelastically while the woman does not work.20 Since there is no heterogeneity within genders, we analyze the representative agent problem of married households along with the investment decisions of single men and women. Preferences of individual i ∈ {m, f }, for male and female, who is born in period t are defined over second-period consumption, cit+1 , and a transfer to both offsprings, 2bt+1 . They are represented by a log-linear utility function U (cit , bt ) = log(cit ) + γ log(2bt ), 19 (4) Notice that we use the same elasticity of production with respect to labor in the manufacturing and agriculture sector. This assumption is helpful in solving the model analytically. 20 None of our results hangs on this assumption as labor is assumed to be exogenous. 8 where γ is the weight put on children. Denote Kti and Tti as the capital and land, respectively, that member i ∈ {m, f } has, the single’s budget constraint is given by Kti + Tti = bt−1 . (5) Each household has a son and daughter. Using income from their assets and the man’s wage, each husband and wife cooperatively allocate their resources f between the husband’s consumption, cm t , the wife’s consumption, ct , and equal bequest to each of their progeny, bt . The budget constraint that a couple faces in the second period of life is thus f cm t + ct + 2bt = It , (6) where It is household’s income, which is given then by It = rtK Kt + rtT Tt + wt , (7) where rtK and rtT are the returns of capital and land, respectively, and wt is the wage earned by the husband. The household budget constraint includes both the man and woman’s assets. That is, Kt = Ktm + Ktf and Tt = Ttm + Ttf . A husband and wife decide cooperatively how to allocate their resources between the three goods: husband’s consumption, wife’s consumption, and bequest. Thus, economic choices are therefore determined by maximizing the following weighted average utility: f m {cft , cm t , bt } = argmax{θt log(ct ) + (1 − θt ) log(ct ) + γ log(2bt )}, (8) where θt is the wife’s weight in household’s decision and (1−θt ) is the husband’s. This maximization is subject to the constraint (6). θ in turn depends both on the relative income of the spouses as well as the 9 political regime chosen by the men, as discussed below. Thus people take the political regime into account when deciding upon their investments when single and allocations when married. 2.3 The No Rights Regime (NR) In the NR regime the husband owns and controls all the capital the household has and manages all its land. Recall that, while wives own their land, their management is under husbands’ control. To capture this reality in a parsimonious manner, we assume that the husband extracts λ ∈ (0, 1) of the returns on land that the wife brings to the household.21 Therefore, wife’s weight in the household’s decision is given by the share 1 − λ of the returns on wife’s land out of the total household’s resources. That is, the wife’s share of household’s choice would be given by θt = 2.4 (1 − λ)rtT Ttf . I (9) The Rights Regime (R) In the R regime each member owns, manages and controls her (his) assets. Thus, the wife controls all the returns of all the assets she brings to the household. In this case, the wife’s welfare weight would be given by rtT Ttf + rtK Ktf θt = , I (10) 21 The legal reality was that the men controlled the rental income from the wife’s land, but could not sell or bequeath the land without the wife’s permission, and the land would return to her upon dissolution of the marriage. We thus think of λ as capturing the rental flow of the land over the course of the marriage. 10 2.5 Determination of the Political Regime The political regime is determined by a vote among the male population before marriages take place. Individuals’ portfolio depends upon the outcome of the men’s decision, as described above. Under the assumption that men will vote for N R when both regimes yield the same utility, granting rights will occur if and only if: (Utm )R > (Utm )N R . (11) Two economic forces dictate whether inequality (11) holds. The first is that, under the NR regime, husbands have control over the women’s capital and a fraction λ of their land, leading to greater power within the household and thus a male preference for the NR regime. However, the NR regime distorts the women’s perception of the different assets, which may lead to inefficiency in resource allocation within the economy. In what follows, we examine these tradeoffs in more detail, and derive conditions under which men prefer to share power with their wives. 3 Model Solution We begin by solving for the production side of the economy, taking as given the investment choices made by households. Then we solve for individual choices of individuals in the model by backwards induction. Given a rights regime and the corresponding portfolio of each spouse, we calculate the consumption allocation and bequest for the children. Foreseeing the solution to the household problem, singles make their portfolio choice. Notice that in order to solve for the portfolio choice of men and women, we need to know the returns to both land and capital, as solved for in the production side of the economy. As noted, production in turn depends on the portfolio allocations, yielding a general equilibrium problem. As a last step, men take into account how their choice of granting women’s 11 rights affects both investment choices of singles before marriage along with household allocations of couples after marriage. 3.1 Production and Factor Prices The final good producers take as given prices of intermediate goods and maximize their profits: {YtA , YtM } = argmax n (YtA )ρ + (YtM )ρ ρ1 − PtM YtM − PtA YtA o (12) In turn, profit maximization by the final good producer, using the first order conditions of (12), give the following inverse demand functions for the intermediate goods: 1 −1 PtM = (YtM )ρ−1 (YtA )ρ + (YtM )ρ ρ 1 −1 PtT = (YtA )ρ−1 (YtA )ρ + (YtM )ρ ρ . (13) The intermediate agricultural good producers maximize the following profit T A α A 1−α {Tt , LA − rtT Tt − wt LA , t } = argmax Pt At (Tt ) (Lt ) t (14) and for the intermediate manufacturing good producers it is given by M M α M 1−α − rtK Kt − wt LM . {Kt , LM t t } = argmax Pt At (Kt ) (Lt ) (15) These maximization problems give the following first order conditions rtT rtK = αPtT AA t = αPtM AM t 12 LA t Tt 1−α LM t Kt (16) 1−α (17) wt = (1 − α)PtT AA t Tt LA t α = (1 − α)PtM AM t KtM LM t α . (18) Notice that wages are equalized between workers in agriculture and manufacturing as labor can move freely between them. However, the rates of return on land and capital are not necessarily equalized. If women are disincentivized from investing in capital due to coverture, there might be an under accumulation of capital leading to excessive returns. This point is crucial as it is the source of economic inefficiency under the NR regime. 3.2 Household Optimal Choice We begin by analyzing the household choice given a portfolio and political regime. Maximizing (8) subject to (6) gives the following optimal choices θI , 1+γ (19) (1 − θ)I , 1+γ (20) γI . (1 + γ) (21) cf = cm = and b= Notice that this formulation is general. That is, the political regime will affect both I and θ, but once they have been determined, these equations dictate the solution to the household problem. 3.3 Individual Portfolio Optimal Choice Individuals’ portfolio choices depend on the political regime as the latter impacts the assets over which men and women have control. 13 3.3.1 The No Right Regime (NR) Substituting household’s optimal choices: (19), (20) and (21); individual’s budget constraint (5) and individual’s share in household decision under the N R regime, (9) into individual’s utility function, (4) gives an optimal behavior that can be derived from maximizing the following problem for women: n o Ttf = argmax log[Ttf rtT (1 − λ)] + γ log[Ttf (rtT − rtK ) + Ttm rtT + (Ktm + bt−1 )rtK + w] , (22) and the corresponding problem for men: n Ttm = argmax log[Ttm (rtT − rtK ) + λTtf rtT + (Ktf + bt−1 )rtK + w] o f T f m T K K + γ log[Tt (rt − rt ) + Tt rt + (Kt + bt−1 )rt + w] . (23) The solution to women’s maximization problem, (22) and men’s maximization problem, (23) depend on returns on land, rtT , the returns on capital, rtK and the budget constraint, (5). This optimal choice is summarized in the following Lemma Lemma 1 Women’s optimal investment is given by (i) Ttf = bt−1 (ii) Ttf = min{bt−1 , rtT T m +(bt−1 +K m )rK +w } (1+γ)(rtK −rtT ) if rtT ≥ rtK , if rtT < rtK . And men’s optimal investment is given by (i) Ttm = bt−1 if rtT > rtK , (ii) Ktm = bt−1 if rtT < rtK , (iii) any combination such that Ttm + Ktm = bt−1 if rtT = rtK . Proof: Follows directly from the first order conditions and the constraint (5). 2 14 3.3.2 The Right Regime (R) Substituting household’s optimal choices: (19), (20) and (21); individual’s budget constraint (5) and individual’s share in household decision under the R regime, (10) into individual’s utility function, (4) gives an optimal behaviour that can be derived from maximizing the following problem for women: n Ttf = argmax log[Ttf (rtT − rtK ) + bt−1 rtK ] o + γ log[Ttf (rtT − rtK ) + Ttm rtT + (Ktm + bt−1 )rtK + w] , (24) and the corresponding problem for men: Ttm = argmax log[Ttm (rtT − rtK ) + bt−1 rtK + w] o f T f m T K K + γ log[Tt (rt − rt ) + Tt rt + (Kt + bt−1 )rt + w] . (25) The solution to women’s maximization problem, (24) and men’s maximization problem, (25) depend on returns on land, rtT , the return capital, rtK , and the budget constraint, (5). This optimal choice is summarized in the following lemma Lemma 2 Women’s optimal investment is given by (i) Ttf = bt−1 if rtT > rtK , (ii) Ktf = bt−1 if rtT , < rtK , (iii) any combination such that Ttf + Ktf = bt−1 if rtT = rtK . And men’s optimal investment is given by (i) Ttm = bt−1 if rtT > rtK , (ii) Ktm = bt−1 if rtT < rtK , (iii) any combination such that Ttm + Ktm = bt−1 if rtT = rtK . Proof: Follows directly from the first order conditions and the constraint 2 given in (5). 15 3.4 Market Clearing We need to verify that the goods markets clear, that the capital and land supplied by the household are equal to those demanded by the firms, and that the labor market clears. Specifically, the goods market clearing involves production to be equal to consumption, as shown by f Y t = cm t + ct + 2b (26) The capital market clears, as shown by Kt = Ktm + Ktf , (27) where Kt is the capital used by the manufacturing sector, as in Equation 15, and Ktm and Ktf are the capital choices by men and women, respectively. The land market clears, as shown by Tt = Ttm + Ttf , (28) where Tt is the land used by the agricultural sector, as in Equation 14, and Ttm and Ttf are the land choices by men and women, respectively. The last equilibrium condition is labor market clearing: A LM t + Lt = 1. 3.5 (29) General Equilibrium We now define the general equilibrium of the economy. Definition 1 General equilibrium in the economy is a set of prices {PtT , PtM , wt , rtk , rtt }, allocations in the production side of the economy {Yt , YtM , YtT , Tt , Kt , LTt , LM t }, portfolio choices of the household {Ttf , Ttm , Ktf , Ktm }, household allocation {cft , cm t , bt }, and a series of political regimes for each date t, such that: 16 1. Given prices and a rights regime, YtA and YtM solve Equation (12), Yt is given by f f M m m Equation (1), Tt and LA t solve (14), Kt and Lt solve (15), {Tt , Kt , Tt , Kt } are given by Lemma 1 when there are no women’s rights and Lemma 2 when women do have property rights. Finally, {cft , cm t , bt } solve Equations (19), (20), and (21), where θ is determined according to Equation (9) when women do not have property rights and Equation (10) when they do have property rights. 2. Given allocations, PtT and PtM are set by Equation (13). wt is set by Equation (18), rtT is set by Equation (16), and rtK is set by Equation (17). 3. Budgets balance and markets clear. Individual portfolio choices of men and women, {Ttf , Ktf , Ttm , Ktm }, are subject to Equation (5) and the household allocation a M {cft , cm t , bt } are subject to Equation (6). The labor market allocation Lt and Lt clears as described in Equation (29). The goods market clears as in Equation (26). The capital market clears as in Equation (27), and the land market clears as in Equation (28). 4. The political regime at each time t is determined by Equation (11). The solution to the equilibrium is relegated to Appendix A. We next describe intuitively the various phases of development of the economy, before showing a numerical example in the following section. In our exercise, we will study development by increasing the relative productivity of the manufacturing sector. The economy experiences three phases along its development path. 1. For AM sufficiently low, the manufacturing sector is small enough that returns between land and capital can be equalized under the NR regime. Accordingly, men do not give rights to women as there is no distortion in the economy. 2. When AM is large but not too large, there begins to be a wedge between the returns to capital and the returns to land. The economy operates below 17 potential, but not so much so that men are willing to grant women rights. 3. Finally, after AM grows high enough, the distortion in the economy becomes great enough that men grant women rights. 4 A Numerical Example In this section, we solve a numerical example of the model in order to illustrate how it works. As mentioned above, there are three phases of development. First, as AM is low, there is no distortion caused by coverture. After a certain point, there is insufficient capital provided to the manufacturing sector, causing an increasing degree of inefficiency. When the inefficiency grows, men eventually give women rights. First we describe the solution method for the numerical example, along with parameters chosen, and then we show various results from the model along with the economics of these results. 4.1 Numerical Solution and Parameters For the example, we create an evenly spaced grid of AM from 0.5 to 5, while holding AT constant. This allows for the example to illustrate what happens in the model as manufacturing grows in relation to agriculture, as happened historically. For each grid point, we first solve the model for the case where women are not given property rights as follows. First, assume that rk = rt , solve for the general equilibrium as outlined in Appendix A. If indeed there is a solution with rk = rt , then the economy is operating without any distortions. Otherwise, we solve the model under the assumption that returns are not equalized. To do so, we perform an iterative process as follows: 1. Guess w, rk , rt , and infer portfolio allocations for men and women using Lemma 2, and thus K and T . 2. Using equations (18) and (29), solve for LM and LA . 18 3. Using K, T , LM , and LA , infer w, rk , and rt using equations (18), (17), and (16). 4. Update guess and iterate until convergence. Additionally, we solve the model at each grid point under the assumption that women have property rights. This uses the same process as when returns are equalized under the no-rights regime, and is detailed further in Appendix A. The exercise that follows is a comparative static. We change AM , while holding all other parameters, including the assets people have to invest, bt−1 , constant.22 We solve the model using the following parameter values: bt−1 = 5.5; γ = 10; λ = 0.7; ρ = 0.5; α = 0.5; At = 1; These parameter values do not come from a serious calibration exercise, and are just meant to be part of an illustrative example. 4.2 Results We now show graphically the results of the numerical exercise and discuss the economic intuition behind the model. For all graphs, unless otherwise speci22 While we have also solved the model with full dynamics, that is, a constant exogenous growth rate of technology and allowing bequests to be endogenously determined. The results are qualitatively the same. However, we believe that the comparative static model makes the point clearer. Specifically, this way of doing the exercise allows us to focus on the effect of technological growth without interference from growth of bequests received from parents (bt−1 ). 19 20 0.5 No Rights Rights With Change 0.45 No Rights Rights With Change 18 0.4 16 0.35 14 Income theta 0.3 0.25 0.2 12 10 0.15 8 0.1 6 0.05 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 4 0.5 1 1.5 2 2.5 3 3.5 4 4.5 Am Am Fig. 1: Women’s bargaining power (θ) and Household Income as functions of Am fied, the line ’No Rights’ shows the evolution of these variables if women are never given rights, the line ’Rights’ shows these variables if women always have rights, and the line ’With Change’ shows the evolution of these variables if men optimally choose to switch political regimes. Figure 1 shows, in the left panel, how women’s bargaining power (θ) and, in the right panel, how household income evolve with AM . First notice that θ remains constant when women have rights. That is, economic growth does not differentially affect bargaining power by gender in the model. However, when women do not have rights and rk begins to increase relative to rt , θ begins to decrease. This because women are getting lower returns on their asset relative to men, resulting in them losing intra-household bargaining power. When men give women rights, θ jumps, as women’s portfolio incentives become undistorted, and they can realize the same returns as men. Turning to income, when returns are equalized between the assets, income is not affected by the political regime. This can be seen by the two curves being the same for low values AM . However, when there is a wedge, income grows slower under the no-rights regime. This is as women are forced to receive lower returns on their assets, and underinvestment in capital yields lower wages for 20 5 1.1 10 No Rights Rights With Change 9 rt = rk , no rights 1 r < r , no rights t k rt = rk , rights 0.9 Return to capital Capital 8 7 6 0.8 0.7 0.6 0.5 5 0.4 4 3 0.5 0.3 1 1.5 2 2.5 3 3.5 4 4.5 0.2 0.5 5 1 1.5 2 2.5 3 3.5 4 4.5 Am Am Fig. 2: Capital and Returns to Capital as functions of Am men. When rights are given, household income increases immediately. These two graphs thus show the tradeoff for men when considering granting rights. On one hand, women’s rights imply higher total income, on the other, they reduce men’s intra-household bargaining power. Figure 2 shows, in the left panel, the capital stock and, in the right panel, the returns to capital as a function of AM . We begin with the capital stock. First note that the capital stock grows continuously when women always have rights. This is standard in growth models. Turning to the example without rights, notice that at some point, the capital stock stops accumulating. This is when men are only buying capital and women are only buying land. This specialization of asset portfolios persists until the wedge in returns is sufficiently large in order to entice women to buy an asset that they won’t fully appreciate due to coverture laws. This interpretation can be seen clearly in the return to capital graph, which is growing sharply during the period in which women do not buy capital, and then slows down after women start buying capital. Figure 3 shows, in the left panel, the fraction of labor in manufacturing and, in the right panel, the fraction of portfolios in capital. Turning to the fraction of labor in manufacturing, the curve with rights is as expected- continuous and 21 5 0.9 1 No Rights Rights With Change 0.8 0.9 0.7 0.7 % Capital Labor-Manufacturing 0.8 0.6 0.6 Women Men With Rights No Rights 0.5 0.4 0.5 0.3 0.2 0.4 0.1 0.3 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 Am Am Fig. 3: Fraction of Labor in Manufacturing and Portfolios functions of Am smooth growth. The no-rights curve follows the same intuition as the capital curve described above. When there is no distortion, it follows the same path as when women have rights. When there is a distortion, it first grows slowly as there is underinvestment in capital, and then slightly more quickly when women start buying capital. We now turn to the portfolio graph. When women have rights, they and men face the same incentives, and thus the ’With Rights’ line represents men’s portfolio, women’s portfolio, and the aggregate economy’s portfolio, which follows the same trajectory as the aggregate capital stock. The curve ’Women’ shows women’s portfolio when there are no rights, ’Men’ shows the men’s portfolio when there are no rights, and ’No Rights’ shows the aggregate economy’s portfolio. Notice that men quickly put all their money into capital, as they maximize their individual returns. Women start by not putting any money into capital, as it gets confiscated by their husband, but when the returns to capital are large enough, they buy some anyway, and the fraction of capital in their portfolio begins to grow. Finally, we turn to Figure 4 to study men’s utility and decision to grant rights. In this figure, we show the difference in men’s utility when women have rights 22 5 0.1 Mens utility with rights - no rights 0.05 0 Um -0.05 -0.1 -0.15 -0.2 -0.25 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Am Fig. 4: Difference in Men’s Utility: Rights - No Rights as compared to when they do not have rights. Thus, when this curve is negative, men do not grant property rights, while they do when the curve is positive. At the beginning, men do not give property rights, and this curve is flat. Specifically, there is no distortion in the economy, so men perceive no benefit to granting women rights. Once the distortion is present, as rk > rt , it grows rapidly at first as women do not buy any capital, resulting in the strongly positive slope in the graph. At some point, women begin to buy capital despite coverture laws, which slows down the increase of the distortion. Eventually, however, the distortion in the economy is large enough that men choose to grant women rights. 5 Empirical Evidence In this section we provide evidence consistent with the mechanism studied above. Specifically, we establish a two way relationship between women’s liberation and industrialization. First, we show that in each decade, states that gave prop23 erty rights to women had a larger share of workers in industry than other states. This is consistent with the model’s prediction that only when inefficiency is sufficiently large do men grant rights to women. More importantly, the data confirm the model’s prediction for the dynamics of the movement of labor from agriculture to non-agriculture employment. Specifically, as can be seen in Figure 3, the model predicts that the fraction of non-agricultural employment is growing concavely with respect to time before rights are granted, has a discrete jump at the time of granting rights, and then is concave again after rights are granted. We show here that the data exactly confirm this sharp hypothesis. 5.1 Data Sources Data on women’s liberation comes from Geddes and Lueck (2002).23 They coded the year in which states granted women rights. Following the standard they began in the literature we consider women’s rights to have been granted in states when both property rights and control over income had been granted to married women. The variable is called rights. Data on non-agricultural employment is taken from census data for the years 1850-1920 (Ruggles, Alexander, Genadek, Goeken, Schroeder, and Sobek 2010). There is no data for 1890. We deal with this in two ways. First we linearly interpolate between 1880 and 1900. Secondly we repeat the analysis without data for 1890.24 5.2 Results Figure 5 shows the fraction of workers in non-agricultural sectors by census year for states that have already granted rights and states that have not. The figure shows that for all census years, states that granted rights to women had a higher 23 24 We thank the authors for making their data available to us. Results without 1890 are very similar and are not reported for brevity. 24 share of their workforce in non-agricultural sectors. This is consistent with the view that granting rights was related to the growth of industrialization. 0.80 0.75 0.70 0.66 0.65 Fraction of Workers in the Non-Agricultural Sector 0.60 0.60 0.58 0.58 0.55 0.52 0.50 0.47 0.64 0.60 0.49 0.46 0.52 0.44 0.40 0.40 0.30 0.20 0.10 0.00 1850 1860 1870 1880 1890 1900 1910 1920 Year Rights No Rights Fig. 5: Cross State Comparison of Non-Agriculture Employment Our model predicts a specific dynamic of changing employment rates with respect to the date of granting married women property rights, as seen in Figure 3. In order to check these dynamics empirically, we need to control for state effects, as different states had different levels of agricultural employment, and year fixed effects, as there was a natural tendency over time to shift towards nonagricultural employment.25 Notice that state effects, year effects, and the difference in time since granting women rights are jointly collinear. Each state granted rights in a particular year, which implies that controlling for the state implicitly controls for that year. Including the difference in time since granting rights thus pins down a year. For example, if rights were granted in 1870 in a particular state, 25 Additionally, the differential effect of the Civil War on southern states needs to be taken into account, as described below. 25 and the observation is looking at +10 years since granting rights, the observation must be at 1880. Thus, state fixed effects and differences in time since granting rights joint imply a calendar year, and are therefore perfectly collinear with year fixed effects. We follow Stevenson and Wolfers (2006) approach in estimating the effects of granting women’s rights over time while still being able to include state and year fixed effects. Accordingly, we estimate separately the dynamics of nonagricultural employment after and before rights were given, and thus estimate two regressions, one designated ’After’, and the second designated ’Before’.26 In the ’After’ regression, we have dummy variables for every 10 years (starting with 0) since rights were granted to married women. The base is thus all the time periods in which women did not have property rights. Conversely, the ’Before’ regression includes dummy variables for every 10 years before rights were granted (starting with 0). The base is thus all time periods at least ten years after women were granted property rights. These two regressions allow us to separately analyze the dynamics of non-agricultural growth before and after rights were given to women while including state and year fixed effects. Our specification is of the form: ln LM st = X αk · rightskst + λs + dt + controlsst + st k where ln LM st is the log of the fraction of workers in non-agricultural sectors in state s in year t, t ∈ {1850, 1860, . . . , 1920} and rightskst is a series of dummy variables set equal to one if a state had granted rights k years ago, where k ∈ {0, 10, 20, 30, 40, 50} for the ’After’ regressions and k ∈ {0, −10, −20, −30, −40, −50} 26 Stevenson and Wolfers (2006) studies the effects of unilateral divorce laws on suicide over time, exploiting cross-state timing of divorce law changes. They also control for state and year fixed effects, and thus provide an excellent basis for our empirical analysis. While Stevenson and Wolfers (2006) only studies the ’After’ component, the methodology is generalizable to the ’Before’ case as well. 26 for the ’Before’ regressions.27 λs and dt are state and year dummies and controlsst = {south × d1870 , south × d1880 , Fraction of Menst , Female Schoolst } are dummies for south states interacted with postbellum years to account for war destruction, the fraction of the state’s population that is male, and the fraction of the state’s school age women who are in school.28 Table 1 shows the results for the ’After’ regressions. The table shows the dynamic effect of granting rights on non-agricultural employment after rights were granted. Column 1 shows the estimates for how the fraction of workers in non-agriculture evolved after the granting of rights. The coefficient on rights0 implies a discrete and statistically significant jump when rights are given, with a point estimate of 0.092, implying a roughly 10% increase of employment in nonagriculture when rights are granted. We next turn to the coefficients on rights10 through rights30 , which are statistically significant at least at the 10% level. Each of these coefficients is the change in employment of non-agriculture workforce relative to a base of when there were no-rights for married women. These estimates are increasing in a concave manner, as predicted by the theoretical model. The lack of significance of the estimates for rights40 and rights50 implies that the effects of granting rights dissipates after 30 years. Columns 2 and 3 show these results are robust to adding controls for the south after the Civil War, to the fraction of women in school, and to the fraction of people in the state who were men. Table 2 shows the results for the ’Before’ regressions. The table shows the dynamic evolution of non-agricultural employment prior to rights being granted. 27 We use increments of 10 as our data is dependant on the decennial census. For states that granted rights not in a census year, we round to the nearest decade. For example, California granted rights in 1872. For our purposes, we round to 1870. Thus, the dummy variable rights0st takes the value of 1 for California in 1870, while the dummy variable rights1st 0 takes the value 1 for California in 1880. Our results are robust to always rounding up. Using California again as an example, we code 1880 as the first year rights exist, rather than 1870, as to avoid the case of assigning rights to California before rights were actually granted. 28 Regressions of the same structure using the fraction of non-agricultural workers (and not the log of that variable) as the dependent variable are very similar although there are somewhat less precise. Still all results are significant at less than 10%. The final two variables, Fraction of Men and Female School, are taken from Geddes and Lueck (2002) and included for completeness here. 27 Table 1 After (1) ln LM st 0.092+ (0.050) (2) ln LM st 0.083+ (0.047) (3) ln LM st 0.082+ (0.047) rights10 0.172∗ (0.073) 0.148∗ (0.071) 0.148∗ (0.071) rights20 0.208∗ (0.100) 0.190+ (0.101) 0.190+ (0.100) rights30 0.212+ (0.124) 0.221+ (0.123) 0.221+ (0.123) rights40 0.186 (0.143) 0.207 (0.143) 0.207 (0.144) rights50 0.150 (0.164) 0.179 (0.163) 0.179 (0.165) F-test of joint significance p=0.00 p=0.01 p=0.01 Year dummies Yes Yes Yes State dummies Yes Yes Yes South×1870 No Yes Yes South×1880 No Yes Yes Female School No No Yes No 356 0.938 No 355 0.952 Yes 355 0.952 rights0 Fraction of Men N R2 NOTE. All models are weighted by state population. Standard errors, clustered at the state level, are reported in parentheses. +p < 0.10, *p < 0.05. 28 Each of the coefficients on rights, shown in column 1, is the change in employment of non-agriculture workforce relative to a base of at least 10 years after rights were granted. The coefficients on rights0 and rights−10 jointly imply a discrete and statistically significant jump when rights are given, as they are statistically different at a p-value of 0.01 or lower, depending on the model specification. We next turn to the coefficients on rights−10 through rights−50 , which are statistically significant at least at the 5% level. These estimates are increasing in a concave manner, as predicted by the theoretical model.29 Columns 2 and 3 show these results are robust to adding controls for the south after the Civil War, to the fraction of women in school, and to the fraction of people in the state who were men. 6 Concluding Remarks In this paper, we propose and model a novel mechanism through which men choose to give women rights through a desire to correct capital market imperfections related to women’s portfolio choices. The story is consistent with historical evidence on how the laws of coverture affected investment decisions by married women. Furthermore, we show that people were aware at the time of the implications of women’s property rights on financial markets. We solve a general equilibrium model with endogenous property rights determination, and study a numerical example which illustrates how technological growth in manufacturing interacts with the laws of coverture in order to induce inefficiencies. When deciding whether to grant women rights, men face a tradeoff. On one hand, granting rights may increase overall output, and thus household income, while on the other hand, granting rights reduces men’s bargaining power within the household, reducing their share of household income. At a To avoid confusion, recall that rights−50 is 50 years before rights are granted while rights−10 is 10 years prior. Moving from 50 years to 10 years prior to granting rights, the estimates become less negative in a concave manner. 29 29 Table 2 Before (1) ln LM st -0.136∗ (0.028) (2) ln LM st -0.113∗ (0.031) (3) ln LM st -0.113∗ (0.031) rights−10 -0.235∗ (0.049) -0.185∗ (0.051) -0.185∗ (0.052) rights−20 -0.255∗ (0.064) -0.216∗ (0.064) -0.216∗ (0.064) rights−30 -0.234∗ (0.079) -0.201∗ (0.079) -0.201∗ (0.080) rights−40 -0.315∗ (0.097) -0.213∗ (0.088) -0.213∗ (0.088) rights−50 -0.499∗ (0.090) -0.392∗ (0.103) -0.392∗ (0.102) F-test of joint significance p=0.00 p=0.00 p=0.01 F-test for a “jump” p=0.00 p=0.01 p=0.01 Year dummies Yes Yes Yes State dummies Yes Yes Yes South×1870 No Yes Yes South×1880 No Yes Yes Female School No No Yes No 356 0.941 No 355 0.953 Yes 355 0.953 rights0 Fraction of Men N R2 NOTE. All models are weighted by state population. 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A LEXANDER , K. G ENADEK , R. G OEKEN , M. B. S CHROEDER , AND M. S OBEK (2010): Integrated Public Use Microdata Series: Version 5.0 [Machine-readable database]Minneapolis, MN. 33 S TEVENSON , B., AND J. W OLFERS (2006): “Bargaining in the Shadow of the Law: Divorce Laws and Family Distress,” Quarterly Journal Economics, 121(1), 267– 288. 34 A Solution to the General Equilibrium We next calculate the general equilibrium under each one of the two political regimes. A.0.1 The No Right Regime (NR) Under the NR regime two qualitatively different cases are considered: Case A, when the equilibrium gives rise to an efficient allocations of resources, that is rtT = rtK ; and Case B, when inefficiency arises , that is rtT < rtK . Case A, rtT = rtK : In this case the system could be reduced and described by 14 variables and 15 equations. Notice that once we solve this system we can then calculate Y, I, θ, ci , b. The 13 variables are: {Y M , Y A , K, K m , K f , T, T m , T f , P M , P A , rK , rT , w} 35 and the 13 equations are: Y A = AA T α (LA )(1−α) (30) Y M = AM K α (LM )(1−α) (31) 1 −1 ρ P M = (Y M )ρ−1 (Y A )ρ + (Y M )ρ 1 −1 P A = (Y A )ρ−1 (Y A )ρ + (Y M )ρ ρ A 1−α L T A A r = αP A T M 1−α L rK = αP M AM K rT = rK = r (32) (33) (34) (35) (36) 1 = LM + LA (37) α T LA α K M M w = (1 − α)P A LM w = (1 − α)P T AA (38) (39) Kf = 0 (40) Tf = B (41) B = Km + T m (42) 36 The concept of the solution proceeds in the following steps: 1. The first 4 equations, (27)–(30) solves for the 4 variables {Y M , Y A , P M , P A }. Of course as a function of the other variables. In particular, equations (29 ) and (30) are the inverse demand for intermediate goods {Y M , Y A , } and equations (27) and (28) are their supply. These 4 equations solve for quantities and prices. 2. The 4 equations, (31)–(34) solves for T = T 1 (r, LM ) and K 1 = K(r, LM ). 3. The 3 equations, (34)–(36) solves for T = T 2 (w, LM ) and K 2 = K(w, LM ). 4. Steps 2 and 3 along with equations (29) and (30) and the supply for assets: equations (37), (38) and (39) we solve for the five variables {K, T, r, w, LM , LT }. 5. So far we used 12 equations, (27)–(38) to solve for 12 variables. Notice that {rK , rT } are two variables and we solved for LA . 6. Once T and K are solved individuals’ optimal portfolio choice, equations (37), (38) and (39) pins down K m , K f , T m , T f . Solution: Isolating Pm PT from (31), (32) and (33) gives PM AA = M PA A Isolating Pm PT LA K T LM 1−α (43) from (35) and (36) gives PM AA = PA AM T LM LA K α (44) From (43) and (44) we get LA LM = T K 37 (45) Substituting (45) into (44) PM AA = PA AM (46) (46) along with (29) and (30) gives YM YA 1−ρ = AM AA (47) substituting (27) and (28) into (47) gives K α (LM )(1−α) T α (LA )(1−α) 1−ρ = AM AA ρ (48) From (48), (45) and (34) we solve for LM " LM = 1 + AM AA −ρ #−1 1−ρ (49) From (37)–(39) T = 2B − K m (50) K = K m = 2BLM (51) and Thus {K, T, LM , LA } are solved, from (27) and (28) we solve got {Y M , Y A }, then (29) and (3) solve got {P M , P A }, (31) and (35) solves for r and w. 38 Case B, rtT < rtK : As in the previous case, in this case the system could be reduced and described by 13 variables and 13 equations. Notice that the equalization in the interest rate is replaced by full identification of individuals’ portfolio choice, while in the previous case men were indifferent between holding real or moveable assets. The 13 variables are: {Y M , Y A , K, K m , K f , T, T m , T f , P M , P A , rK , rT , w} and the 13 equations are: Y A = AA T α (LA )(1−α) (52) Y M = AM K α (LM )(1−α) (53) 1 −1 P M = (Y M )ρ−1 (Y A )ρ + (Y M )ρ ρ 1 −1 PT = (Y A )ρ−1 (Y A )ρ + (Y M )ρ ρ A 1−α L T T A r = αP A T M 1−α L rK = αP M AM K 1 = LM + LA (54) (55) (56) (57) (58) α T LA α K M M w = (1 − α)P A LM 2BrK + w Kf = B − K (r − rT )(1 + γ) 2BrK + W Tf = (rK − rT )(1 + γ) w = (1 − α)P T AA (59) (60) (61) (62) Km = B (63) Tm = 0 (64) 39 The concept of the solution proceeds in the following steps: 1. The first 4 equations, (27)–(30) solves for the 4 variables {Y M , Y A , P M , P A }. Of course as a function of the other variables. In particular, equations (29 ) and (30) are the inverse demand for intermediate goods {Y M , Y A , } and equations (27) and (28) are their supply. These 4 equations solve for quantities and prices. 2. The 4 equations, (32)–(35) solves for T = T 1 (r, LM ) and K 1 = K(r, LM ). 3. The 3 equations, (35)–(37) solves for T = T 2 (w, LM ) and K 2 = K(w, LM ). 4. Steps 2 and 3 along with equations (29) and (30) and the supply for assets: equations (37), (38) and (39) we solve for the five variables {K, T, r, w, LM , LT }. 5. So far we used 12 equations, (27)–(38) to solve for 12 variables. Notice that {rK , rT } are two variables and we solved for LA . 6. Once T and K are solved individuals’ optimal portfolio choice, equations (37), (38) and (39) pins down K m , K f , T m , T f . Solution: Isolating Pm PT from (54) and (55) gives PM AA = PA AM Isolating Pm PT T LM LA K α (65) from (49) and (50) gives PM = PA YA YM 1−ρ (66) Substituting (47) and (48) into (66) we get PM = PA AA T α (LA )(1−α) AM K α (LM )(1−α) 40 1−ρ (67) from (65) and (67) we get AA AM ρ = K T αρ LA LM 1−ρ+αρ (68) looking at the supply side of factors of production (assets invested by individuals, which is driven by individuals’ portfolio optimal choice) summarized in equations (56)–(59) gives K = 2B − and T = 2BrK + w (rK − rT )(1 + γ) 2BrK + w (rK − rT )(1 + γ) (69) (70) Substituting (69), (70) and (53) into (68) and rearranging gives the solution of LM as a function of returns to assets {rK , rT } ( M L = 1+ )−1 −ρ α M 1−ρ+αρ A 2B(1 + γ)(rK − rT ) −1 2BrK + w AA (71) Now we can get all variables as a function of {rK , rT }. Specifically, equations (60) and (61) implicitly solve for rK and rT . A.0.2 The Right Regime (R) In this case, there is no friction in the model and rK = rT must hold. In this case the system could be reduced and described by 13 variables and 13 equations. Notice that the equalization in the interest rate is replaced by full identification of individuals’ portfolio choice, while in the previous case men were indifferent between holding real or moveable assets. The 13 variables are: {Y M , Y A , K, K m , K f , T, T m , T f , P M , P A , rK , rT , w} 41 and the 13 equations are: Y A = AA T α (LA )(1−α) (72) Y M = AM K α (LM )(1−α) (73) 1 −1 ρ P M = (Y M )ρ−1 (Y A )ρ + (Y M )ρ 1 −1 P A = (Y A )ρ−1 (Y A )ρ + (Y M )ρ ρ A 1−α L T T A r = αP A T M 1−α L rK = αP M AM K rT = rK = r (74) (75) (76) (77) (78) 1 = LM + LA (79) α T LA α K M M w = (1 − α)P A LM w = (1 − α)P T AA (80) (81) B = Kf + T f (82) B = Km + T m (83) K = Kf + Km (84) Solution: Isolating Pm PT from (71), (72) and (73) gives PM AA = PA AM Isolating Pm PT LA K T LM 1−α (85) from (75) and (76) gives PM AA = PA AM 42 T LM LA K α (86) From (43) and (44) we get LA LM = T K (87) PM AA = PA AM (88) Substituting (45) into (44) (46) along with (69) and (70) gives YM YA 1−ρ = AM AA (89) substituting (67) and (68) into (89) gives K α (LM )(1−α) T α (LA )(1−α) 1−ρ = AM AA ρ (90) From (90), (87) and (74) we solve for LM " LM = 1 + AM AA −ρ #−1 1−ρ (91) Given that the individuals are indifferent between investing in two assets, we substitute T = 2B − K, which yields 1 − LM LM = 2B − K K 2B − K 1 −1= LM K K LM = 2B (92) (93) (94) Thus once LM is solved, K and T are solve as well. From here all variables can be backed out. 43