Working Paper. Rent seeking activities and aggregate economic performance - the case of Greece OCTOBER 2018ERWORKINGPAPERWORKINGPAPERWORKINGPAPERWORKI

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1 BANK OF GREECE EUROSYSTEM Working Paper Ren seeking aciviies and aggregae economic performance - he case of Greece Sylianos G. Gogos Dimiris Papageorgiou Vanghelis Vassilaos 252 OCTOBER 2018ERWORKINGPAPERWORKINGPAPERWORKINGPAPERWORKI

2 BANK OF GREECE Economic Analysis and Research Deparmen Special Sudies Division 21, Ε. Venizelos Avenue GR Ahens Τel: Fax: Prined in Ahens, Greece a he Bank of Greece Prining Works. All righs reserved. Reproducion for educaional and non-commercial purposes is permied provided ha he source is acknowledged. ISSN

3 RENT SEEKING ACTIVITIES AND AGGREGATE ECONOMIC PERFORMANCE- THE CASE OF GREECE Sylianos G. Gogos Eurobank Ergasias S.A. Dimiris Papageorgiou Bank of Greece Vanghelis Vassilaos Ahens Universiy of Economics and Business Absrac We buil upon Angelopoulos e al. (2009) and we employ a dynamic general equilibrium model in order o examine he inerrelaed role of ren seeking aciviies, insiuions and governmen policy variables, like ax raes and public spending, on Greece s economic performance during he las foury years. We focus on he period According o Kehoe and Presco (2002, 2007) his period can be characerized as a grea depression. The model is he sandard neoclassical growh model augmened wih a governmen secor and an insiuional srucure which creaes incenives for opimizing agens o engage in ren seeking coness in order o exrac rens from he governmen. This behavior creaes a cos o he economy in he form of an unproducive use of resources. Our main findings are as follows: Firs, in erms of he pah of key macroeconomic variables, our model fis he daa quie well. Second, by conducing a growh accouning exercise we find ha during he period a non negligible proporion of he decline of oal facor produciviy (TFP) can be accouned for ren seeking aciviies. Third, our model produces an index which can be inerpreed as a measure of he qualiy of insiuions in he Greek economy. Our model based index exhibis a resemblance wih he inernal counry risk guide (ICRG) index which is widely used in he lieraure as a proxy for he qualiy of a counry s insiuions. Keywords: Growh Accouning, Ren Seeking, Insiuions, Dynamic General Equilibrium. JEL classificaion: E62, E32, O17, O40 Acknowledgemens: We would like o hank an anonymous referee as well as he seminar audiences a he Ahens Universiy of Economics and Business (Economic Research Workshop, Deparmen of Economics, March 9 h 2017, Ahens Greece) and he 2016 annual meeing of he Associaion of Souhern European Economic Theoriss (ASSET 2016, Thessaloniki, Greece, 10 h 12 h November 2016) for heir fruiful commens. The views expressed in his paper are hose of he auhors and do no necessarily reflec hose of Eurobank and he Bank of Greece Correspondence: Sylianos G. Gogos Eurobank Ergasias S.A. Eurobank Economic Analysis and Financial Markes Research 8 Ohonos sr., 57 Ahens, Greece Tel: sgogos@eurobank.gr

4 1 Inroducion Over he period he Greek economy experienced a subsanial business cycle. More speci cally, during he subperiod (crisis phase) he average annual growh rae of real per capia GDP was -0.07% and during he subperiod (recovery phase) he respecive gure was 3.13%. According o Kehoe and Presco (2002, 2007) he whole period, i.e., , can be de ned as a grea depression. The auhors characerize a period as a grea depression if here is a large, rapid and susained deviaion of real per capia GDP from rend. 1 (Inser Figure 1 abou here) In Gogos e al. (2014a) we asked wheher he sandard neoclassical growh model can accoun for Greece s poor economic performance during he period The answer was a rmaive. The observed oal facor produciviy (TFP) series once fed ino he model could generae an equilibrium pah for mos of he key macroeconomic variables which was very close o he daa. Our moivaion in choosing he neoclassical growh model as our main heoreical vehicle was based on he saisics ha we presen in Figure 1. These sem from a sandard growh accouning exercise based on a neoclassical producion funcion. In Figure 1 we display in erms of indices he pahs of real per capia GDP and of he TFP facor for he period afer removing a linear 2% rend growh rae. 2 Looking a Figure 1 we observe ha in he case of he Greek economy here exiss a srong posiive correlaion beween real per capia GDP and he TFP facor. Hence, given our analysis in Gogos e al. (2014a) our main "diagnosis" was as follows: In order o explore in more deph he Greek grea depression episode we need o invesigae possible facors ha lie behind he pah of TFP. In he lieraure he sandard candidae facors are governmen policy and insiuions (e.g. see Presco (1998) and Kehoe (2003)). In Gogos e al. (2014b) we invesigaed wheher he inroducion of a governmen secor could improve our model s abiliy o mimic he daa. We found ha a model wih consan disorionary axes, public consumpion, public invesmen and consan relaive risk aversion (CRRA) preferences could move our ari cial economy closer o he daa relaive o he sandard neoclassical seing. However, even under ha seing, he mos imporan facor in accouning for Greece s economic performance was he TFP facor. Furhermore, we did no model he link beween governmen policy variables and TFP. Tha is, in Gogos e al. (2014b) we used almos he same exogenous series for TFP as he one we used in Gogos e 1 Kehoe and Presco (2002, 2007) se hree quaniaive crieria for a period o be de ned as a grea depression. The Greek economy for he period sricly mees hese crieria. For quaniaive deails see Gogos e al. (2014a). 2 We de ne derended real per capia GDP as follows: ey = y g T 0 r, where g r is he gross rend growh y T0 rae and T 0 is he saring year of he derending period. For g r we choose a value equal o 2% which is he average annual growh rae of real per capia GDP of he US economy (indusrial leader) during he 20h cenury. The derended TFP facor is compued in he same way. Furhermore, for he di erence beween he de niion of he TFP and he TFP facor see subsecions and

5 al. (2014a). The di erences in he wo sudies lied on he inclusion of governmen policy variables and on a more rich propagaion mechanism bu no on he TFP series. Thus, he "measure of our ignorance", i.e. he TFP series, in Gogos e al. (2014b) remained he same as ha in Gogos e al. (2014a). In his sudy we inroduce ren seeking aciviies and insiuional facors in he model wih he governmen secor of Gogos e al. (2014b). More speci cally, he model, based on he work of Angelopoulos e al. (2009), is he sandard neoclassical growh model augmened wih a governmen secor and an insiuional srucure which creaes incenives for opimizing agens o engage in ren seeking coness in order o exrac rens from he governmen (e.g. see Park e al. (2005)). This behaviour creaes a cos o he economy in he form of an unproducive use of resources. Our moivaion is based on he fac ha i is widely recognized in he lieraure ha insiuional facors play an imporan role for a counry s aggregae economic performance (e.g. see Presco (1998), Hall and Jones (1999), Bergoeing e al. (2002) and Angelopoulos e al. (2011)). Furhermore, inroducing ren seeking aciviies which in urn lead o an unproducive use of resources, allows us o endogenize he observed drop in he TFP series during he period (see Figure 1(c)). In our analysis we follow he same mehodological seps as hose in Gogos e al. (2014 a and b). Firs we perform a growh accouning exercise. There we decompose he growh rae of real per capia GDP ino hree facors. These are, he TFP facor, he capial facor and he labour facor. Then we ry o idenify and quanify he sources of he movemens of he growh accouning componens. As sources of variaion we use he following exogenous variables: TFP, qualiy of insiuions, populaion, public consumpion and invesmen and e ecive ax raes. Our main ndings are as follows: Firs, in erms of he pah of key macroeconomic variables, our model s he daa quie well. Second, by conducing a growh accouning exercise we nd ha during he period a non negligible proporion of he decline of oal facor produciviy (TFP) can be accouned by ren seeking aciviies. Third, our model produces an index which can be inerpreed as a measure of he qualiy of insiuions in he Greek economy. Our model based index exhibis a resemblance wih he inernal counry risk guide (ICRG) index which is widely used in he lieraure as a proxy for he qualiy of a counry s insiuions. The srucure of he paper is as follows: Secion 2 presens he model along wih he condiions ha characerize he decenralized compeiive equilibrium. Secion 3 presens he daa, he calibraion of he parameers of our model and he growh accouning exercise. Secion 4 presens ransiion dynamics. Secion 5 presens he resuls. Finally, Secion 6 concludes. 4

6 2 The model We build upon Angelopoulos e al. (2009). Our model is a dynamic general equilibrium model wih a public secor. The ari cial economy consiss of a large number of in niively lived idenical households, a large number of idenical rms, and a public secor. There is no uncerainy (we assume perfec foresigh), all markes clear and all variables are measured in real erms. The represenaive household chooses pahs of consumpion, capial, leisure and he allocaion of non leisure ime beween producive work (labour) and ren seeking aciviies. 3 The represenaive rm produces a homogenous produc using privae capial, public capial (e.g. public infrasrucure), producive work and he available echnology. The governmen levies disorionary axes and uses he revenues o nance public consumpion, public invesmen, lump-sum ransfers and scal privileges o ren seekers (privileged ransfers, subsidies and ax reamens). 4 We solve for a symmeric decenralized compeiive equilibrium (DCE) where: (i) each individual household and each individual rm maximize heir own uiliy and pro s respecively, aking marke prices and governmen policy as given, (ii) he governmen budge consrain is sais ed and (iii) all markes clear hrough price exibiliy. 2.1 Households Each period of ime here is a large number of idenical households N (h = 1; 2; 3:::N ). Their populaion grows a a consan rae equal o g N = N +1 N. The lifeime uiliy of he represenaive household h is: 1X U C h + G c ; H h =T o (1) where 0 < < 1 is he ime discoun facor, C h is consumpion expendiures of he represenaive household h, G c is per household public consumpion, H h is he respecive hours of leisure and he parameer [0; 1] is a measure of he degree of subsiuabiliy beween privae and public consumpion in uiliy. For he insananeous uiliy funcion, we use he following consan relaive risk aversion (CRRA) form: U C h + G c ; H h = C h + G c H h where 0 < < 1 is he consumpion share parameer and 0 is he curvaure parameer. The represenaive household h receives a renal rae, r, and a wage rae, w, for is capial, K h, and producive work services, n h L h. Furhermore, i receives a share of pro s, h, as a shareholder of rms, and per household lump-sum ransfers from he governmen, G. 3 As in Angelopoulos e al. (2009), we assume ha households consume heir available ime for ren seeking aciviies while being a work. 4 For a lis wih speci c scal privileges see Tanzi (1998), Angelopoulos e al. (2009) and Hillman (2009). (2) 5

7 Moreover, given a oal conesable prize (public privileges) denoed as R i receives rens (a share of ha prize) generaed by he non leisure ime in ren-seeking aciviies. Here we decide he conesable prize o be a proporion of oal revenues. Thus, he household s budge consrain is: (1 + c )C h + I h = (1 l )w n h L h + r K h k (r p )K h + 1 k h + G + XN h=1 1 n h L h R (3) 1 n h L h where 0 < c < 1, 0 < l < 1 and 0 < k < 1 are he e ecive ax raes on privae consumpion expendiures, producive work income, ne capial income and pro s respecively. The erms R and wih 0 < < 1, denoe ax revenues and he economy-wide degree of ren exracion respecively. In wha concerns household s h ime endowmen, for every period i has a is disposal h available hours for leisure and non leisure aciviies. 5 I furher divides is non leisure ime, i.e., work ime, L h, beween producive work, n h L h, and ren seeking aciviies, 1 n h L h, hus: h = H h + L h (4) L h = n h L h + 1 n h L h (5) The variable 0 < n h 1 denoes he fracion of non leisure ime ha he household devoes o producive work and 0 1 n h < 1 denoes he fracion of non leisure ime devoed o ren seeking aciviies. Finally, household s h capial sock evolves according o he following equaion: K h +1 = (1 p ) K h + I h (6) where I h is invesmen expendiures and p is he respecive consan depreciaion rae parameer. Each household h acs compeiively by aking prices, policy and economy-wide variables as given. More speci cally, i chooses a vecor of quaniies fk h +1; C h ; n h ; L h g 1 =T 0 o maximize equaions (1) and (2), subjec o (3), (4), (5) and (6). The rs order necessary condiions are: U H h U C h C h + G c ; H h C h + G c ; H h = c 0 (1 l B )w n h XN h=1 1 1 n h R C 1 n h L h A 5 Here we make he following assumpion: each day he household has 14 hours available for leisure and non leisure aciviies. Then each year he available hours for leisure and non leisure aciviies for each household are 14x7x52=

8 ) 1 C h + G c h L h = c 0 B (1 l )w n h XN h=1 1 1 n h R C 1 n h L h A (7) (1 l )w = XN h=1 U C h C h + G c ; H h U C h +1 C+1 h + G c = 1 + c +1; H+1 h 1 + c +1 ) Ch +1 + G c 1 (1 ) +1 h L+1 h ( 1)(1 ) C h + G c 1 (1 ) h L h ( 1)(1 ) = 1 + c 1 + c +1 R (8) 1 n h L h 1 + (1 k +1)(r +1 p ) 1 + (1 k +1)(r +1 p ) The opimaliy condiions are compleed wih he ransversaliy condiion for household s h capial sock: 2.2 Firms lim!1 U C h C h + G c ; H h K h +1 = 0 ) lim!1 C h + G c (1 ) 1 h L h (1 )(1 ) K h +1 = 0 (10) Each period of ime here is a large number of idenical rms M (f = 1; 2; 3:::M ). The represenaive rm f produces a homogeneous produc, Y f, using he following producion funcion: Y f = A K f p (9) K g g 1 Q f p g (11) where 0 < p < 1, 0 < g < 1, and 0 < 1 p g < 1, are he oupu elasiciies of privae capial, K f, public capial (per rm), K g, and producive work, Q f, respecively. Following Lansing (1998) we make he assumpion ha he producion funcion exhibis consan reurns o scale o all hree inpus and as a resul he rm f earns an economic pro equal o he di erence beween he value of oupu and he paymens made o is privae inpus. The variable A is oal facor produciviy (TFP) which grows a an exogenously given rae, g A = A +1 A. The represenaive rm f acs compeiively by aking prices, policy and economy-wide variables as given, and chooses, in each period, he quaniy of producive work, Q f, and privae capial, K f, in order o maximize pro s, f : Q f max ; Kf f = Y f w Q f r K f (12) 7

9 subjec o equaion (11). Taking he rs order necessary condiions wih respec o Q f and K f we ge he following wo opimaliy condiions: w = (1 p g )A K f p K g g Q f p g (13) r = p A K f p 1 g g 1 K Q f p g (14) 2.3 Governmen The governmen collecs ax revenues, R, by axing privae consumpion expendiures, income from producive work, ne capial income and pro s. Ren seekers exrac R, wih 0 < < 1. Then, he governmen uses he remaining ax revenues (1 ) R in order o nance public consumpion, G c (or G c in per household erms), public invesmen, G i (or G i in per rm erms), and lump-sum ransfers, G (or G in per household erms). Thus, he governmen budge consrain is: XN G c XM + G i XN + G = (1 ) R (15) h=1 f=1 h=1 where R = l w XN XN n h L h + k (r p ) K h + k h=1 h=1 XN h + c XN h=1 h=1 C h (16) Furhermore, public invesmen, G i, is used o augmen he public capial sock, K g, whose law of moion has as follows: K g +1 = (1 g ) K g + G i (17) Thus, we have six policy insrumens (G c, G i, G, c, l and k ) ou of which one will be residually deermined o saisfy he governmen budge consrain. Unless oherwise saed, we choose his variable o be lump-sum ransfers, G. 2.4 Economy-wide ren exracion To complee our model we mus specify he economy-wide degree of ren exracion, i.e., 0 < < 1. Again we build upon Angelopoulos e al. (2009) and assume ha increases wih per capia ren seeking aciviies. Using a linear speci caion, we assume: = XN h=1 1 n h L h N (18) where 0 is a echnology variable ha ranslaes ren seeking e or ino ren exracion. Higher values of indicae a more "e cien" ren seeking echnology, hrough permissive 8

10 legal sysems and permissible corrupion, ec. Thus, can be considered as a proxy for he level of insiuional qualiy, wih higher values indicaing worse insiuions The decenralized compeiive equilibrium We solve for a symmeric decenralized compeiive equilibrium (DCE). More speci cally, he DCE consiss of a vecor of quaniies for he represenaive household,fy h ; C h ; I h ; h ; K h +1; n h ; L h ; H h g 1 =T 0, a vecor of quaniies for he represenaive rm fy f ; K f ; Q f ; f g 1 =T 0 and a vecor of prices fw ; r g 1 =T 0, such ha, given sequences for he exogenous variables fa ; N ; g 1 =T 0, he policy insrumens variables fg c ; G i ; G ; c ; l ; k g 1 =T 0, he iniial privae capial sock K h T 0 and he iniial public capial sock K g T 0 : (i) Given prices fw ; r g 1 =T 0, he vecor of quaniies for he household,fy h ; C h ; I h ; h ; K+1; h n h ; L h ; H h g 1 =T 0 solves he household s maximizaion problem, (ii) Given prices fw ; r g 1 =T 0, he vecor of quaniies for he rm fy f ; K f ; Q f ; f g 1 =T 0 solves he rm s maximizaion problem, (iii) Given prices fw ; r g 1 =T 0, he vecor of quaniies for he household,fc h ; K+1; h n h ; L h ; h g 1 =T 0 sais es he governmen budge consrain, (iv) Given he vecors of quaniies for households and rms, fy h ; C h ; I h ; h ; K h +1; n h ; L h ; H h g 1 =T 0, fy f ; K f ; Q f ; f g 1 =T 0, he vecor of prices fw ; r g 1 =T 0 is such ha all markes clear. Thus, in each period, he marke clearing condiions for he goods marke, he labour marke, he privae capial sock marke and pro s, are respecively: XM f=1 XM f=1 XM f=1 XM f=1 Y f = XN h=1 Y h (19) XN Q f = n h L h (20) h=1 XN K f = K h (21) h=1 XN f = h (22) Hence, he DCE is summarized by equaions (3), (4), (6) o (9) and (11) o (22). This is a sysem of eigheen equaions in seveneen endogenous variables, ha is Y h, C h, I h, h, K h +1, K g +1, n h, L h, H h, Y f, K f, Q f, f, R,, w, r, and one policy insrumen variable which is endogenously-residually deermined, G, in each period. 6 We rea he qualiy of insiuions,, as exogenous. See Angelopoulos e al. (2009) for a more general case where he qualiy of insiuions is reaed as an endogenous variable depending on he share of oupu ha he governmen earmarks for he nancing of cours, inspecors, police, prisons, ec. We leave such an exension for fuure research. h=1 9

11 2.6 The aggregae economy In erms of aggregae quaniies, he DCE can be reduced o a sysem in foureen equaions and foureen unknowns. These are: w = (1 p g )A K p (K g ) g (n L ) p g (23) r = p A K p 1 (K g ) g (n L ) 1 p g (24) Y = A K p (K g ) g (n L ) 1 p g (25) = Y w n L r K (26) (1 + c )C + I = (1 l )w n L + r K k (r p )K + 1 k + G + R (27) N h = H + L (28) K +1 = (1 p ) K + I (29) K g +1 = (1 g ) K g + G i (30) 1 C + G c = 1 (1 l N h L 1 + )w c n + R (31) L C +1 + G c 1 (1 ) ( 1)(1 ) +1 N +1 h L +1 (C + G c ) 1 (1 ) ( 1)(1 ) N h L = 1 + c 1 + c (1 k +1)(r +1 p ) (32) (1 l )w = R (1 n ) L (33) G c + G i + G = (1 ) R (34) R = l w n L + k (r p ) K + k + c C (35) = (1 n ) L N (36) where = gn. Hence, he DCE in aggregae erms is summarized by equaions (23) o (36). This is a sysem of foureen equaions in hireen endogenous variables, ha is, Y, C, I,, K +1, K g +1, n, L, H, R,, w, r and one policy insrumen variable which is endogenously-residually deermined, G, in each period. 3 Daa In order o perform he growh accouning exercise and hen simulae our model economy, we mus calibrae our model s parameers, p, g, p, g,,,,, g N and g A assign values o he exogenous variables, A, N,, G c, G i, c, l and k, and produce series for he privae and public capial sock, K and K g (deails for he daa are provided in 10

12 Appendix A). To do so we work as follows: Firs, we mach up our model s variables and daa. Second, we compue series for he privae and public capial sock, K, K g, along wih values for he respecive depreciaion rae parameers, i.e. p and g. Third, we produce esimaes for he oupu elasiciies of privae capial, p, public capial, g, and producive work, 1 p g. Fourh, we produce series for he e ecive ax raes, c, l, k. Fifh, we calibrae he parameers,,,, g N and g A. Finally, we compue series for he echnology variable ha ransforms ren seeking e or o ren exracion,, for he fracion of producive work ime, n, and for TFP, A. 3.1 Mach up model s variables and daa All daa have been exraced from OECD and Groningen Growh Developmen Cener (GGDC) daabases. Our model economy is a closed one wih a public secor. Hence, he income ideniy akes he following form: Y = C + I + G c + G i (37) We de ne oupu, Y, as real gross domesic produc (a facor prices), privae invesmen, I, as real privae gross xed capial formaion, public consumpion, G c, as real general governmen nal consumpion and public invesmen, G i, as real governmen xed capial formaion. 7 is: Using he income ideniy we obain privae consumpion, C, residually. Tha C = Y I G c G i (38) In Figure 2 we presen he evoluion of public consumpion and public invesmen as shares of GDP during he period Clearly, he former variable followed an upward rend pah. More speci cally, from he early 1970s o he lae 2000s i increased by approximaely 10 percenage poins (from 10.20% in 1973 o 20.54% in 2009). The laer variable ucuaed around a band of 1.72% (minimum value in 2011) o 4.68% (maximum value in 1961) wih an average value equal o 3.16%. Finally, excep from public consumpion and public invesmen, he oher exogenous variable which we ake direcly from he o cial daabases (he oher ve, ha is, A,, c, l and k, are consruced) is populaion (number of households), N. In order o be consisen wih he srucure of our ari cial economy where all people are capable of working, we mach up his variable wih daa series for working age populaion. (Inser Figure 2 abou here) 7 Since all series share a common price (one good economy), consisency requires o ransform all variables from nominal o real erms wih he same de aor, ha is, he GDP de aor. Furhermore, we conver real gross domesic produc from marke prices o facor prices by subracing from i ne indirec axes, ha is, axes less subsidies on producion and impors. 11

13 3.2 Privae and public capial sock To compue he privae and public capial sock series we apply he perpeual invenory mehod. To do so, we employ he wo rules of moion for privae and public capial sock (eq. 29 and 30) along wih he series for privae and public invesmen, i.e., I and G i. In order o obain values for he privae and public capial sock depreciaion rae parameers, p and g, and for he respecive iniial values, K T0 and K g T 0, we follow Conesa e al. (2007) and we impose wo resricions. These are as follows: Firs, for he period , he raio of consumpion of xed capial over GDP mus be equal wih ha in he daa. For he privae and he public secor i holds: X2013 =1970 X2013 =1970 p K Y = 10:34% (39) g K g Y = 1:32% (40) Second, he capial-oupu raio in he iniial period (in our case 1960) mus be equal o he average capial-oupu raio over he period Thus: K 1960 Y 1960 = 1 10 K g 1960 Y 1960 = 1 10 X1970 =1961 X1970 =1961 K Y (41) K g Y (42) Equaions (29), (30), and (39) o (42) consiue wo sysems of 55 equaions in 55 uknowns (K 0, K 1,...K 2013, p and K g 0, K g 1,...K g 2013, g ). The soluion of hese wo sysems, along wih he privae and public capial sock series, imply p = 3:96%, K 1960 Y 1960 = 1:3576 and g = 2:59%, K 1960 Y 1960 = 0:3621. As Figure 3 depics, boh he privae and he public capial-oupu raio followed an upward rend pah (capial deepening) during he las 53 years. More speci cally, in he early 1960s he growh rae of he public capial sock was higher han he respecive gure of he privae secor, while for he period 1965 o 1983, he average annual growh rae of he privae capial sock was higher by approximaely 2.76 percenage poins (8.60% vs 5.84%) compared o ha in he public secor. As a resul, he raio of he public over he privae capial sock decreased by 9.83 percenage poins, ha is, from 26.67% o 16.84%. During he nex hiry years, i.e., 1983 o 2013, given an average annual growh rae of he privae capial sock, 2.22%, and of he public capial sock, 2.91%, he same raio increased by 3.88 percenage poins, ha is, from 16.84% o 20.72%. Finally, given he pah of he Greek oupu from 1979 o 2013, he privae capial-oupu raio increased by.86% (from o ) and he public capial-oupu raio by 96.47% (from o ). (Inser Figure 3 abou here) 12

14 3.3 Oupu elasiciies In order o ge values for he oupu elasiciies, p, g and 1 p g, we work as follows: The perfec compeiive labour marke srucure dicaes ha he wage rae is equal o he marginal produc of labour. As a resul, he oupu elasiciy wih respec o labour is equal o he respecive income share. To compue he labour income share we ake ino accoun he fac ha in he Greek economy he self-employed are a considerable fracion of oal employmen 8. Hence, o avoid an underesimaion of he labour share parameer we produce an esimae for oal compensaion of he self-employed (e.g. see Gollin (2002)). We do ha by dividing oal compensaion of employees (ne of employer s social securiy conribuions) wih oal dependen employmen and hen muliplying his wih oal self-employmen. The resul is a consruced annual rae for oal compensaion of he self-employed. Finally, we add he laer gure o oal compensaion of employees and hen we divide his number wih real GDP a facor prices. Hence: where CE DE CE SE Labour share = CEDE + CE SE (43) Y NIT is oal compensaion of employees ha belong o dependen employmen, is he impued oal compensaion of he self-employed and NIT is ne indirec axes, i.e, indirec axes less subsidies on producion and impors. Taking he average of equaion (43) over he period , we compue a value for he labour share parameer equal o 56.60%. 9 In wha concerns he oupu elasiciies of privae and public capial sock, we follow Baxer and King (1993) and we se g equal o he average value of he raio of public invesmen over GDP, Gi Y. In he Greek economy, during he period , his raio was equal o 3.01%. Finally, given he compued values of he oupu elasiciies of labour and public capial, we compue he elasiciy of privae capial (or privae capial income share) residually, ha is, p = 1 56:60% 3:01% = 40:39%. 3.4 E ecive ax raes To compue series for he e ecive ax raes c, l, and k, we follow Papageorgiou (2012) and we adop a variaion from he mehodology of Mendoza e al. (1994). 10 Looking a Figures 2(a) and 4(b) we observe ha during he period 1970 o 2013 he e ecive ax rae on labour income followed a somewha similar paern like he one ha public consumpion as a share of GDP did (a correlaion coe cien equal o 0.88). More speci cally, we noe 8 From 1970 o 2013 he average raio of he self-employed over oal employmen was 38.67%. However, during ha period his raio followed a downward rend pah. In fac i decreased by percenage poins, ha is, from 49.98% in 1970 o 29.57% in Our choice o ake he average over he period is due o daa availabiliy. More speci - cally, ime series for ne indirec axes are available from 1970 o 2013 and for employer s social securiy conribuions from 1965 o For deails see Appendix B. 13

15 wo subperiods of a seep increase, ha is, from 15.77% in 1975 o 25.08% in 1986 and from 22.98% in 1992 o 31.94% in In erms of he pah of he e ecive ax rae on ne capial income, we observe a big jump from 1993 o 2000 (10.69% o 30.84%) and a big fall from 2000 o 2010 (30.84% o 19.64%). During he 19s, he signing of Maasrich reay and he sraegic goal of enering he European Moneary Union (EMU) led he Greek governmen o reduce is public de ci and in order o mee ha goal i ried o increase is revenue by increasing he ax raes on labour and capial income (e.g. see Kollinzas (2000)). Finally, in wha concerns he pah of he e ecive ax rae on privae consumpion expendiures, i increased remarkably beween 19 o 1987 (8.74% o 19.08%), and hen i ucuaed around a band of 14.47% (minimum value in 1989) o 19.08% (maximum value in 1987) wih an average value equal o 17.23%. (Inser Figure 4 abou here) 3.5 Calibraion for parameers,,,, g N and g A For he parameer of subsiuabiliy beween privae and public consumpion in uiliy,, we examine hree di eren cases. Therefore, we run hree experimens. In case 1 we se is value equal o 0, in case 2 equal o 0.5 and in case 3 equal o 1. Obviously, he wo polar cases are 1 and 3. In he former we rea public consumpion as a wase of resources (e.g see Angelopoulos e al. (2009) and Papageorgiou (2012)), while in he laer we rea privae and public consumpion as perfec subsiues. 11 Noe ha he value of parameer a ecs he magniude of he wealh e ec riggered by changes in public consumpion. The higher he value of, i.e. higher degree of subsiuabiliy beween public and privae consumpion, he lower he wealh e ec. Also, as we explain below, he value of he parameer a ecs he fracion of he producive ime and he consruced ime series for he ren seeking echnology. For he uiliy curvaure parameer,, we choose he usual value used in he lieraure, i.e., 2. In wha concerns he consumpion share parameer,, we se is value equal o , and These values correspond o experimens 1, 2 and 3 respecively. Our choice is consisen wih an average value ( ) for he fracion of producive ime, n, equal o 75%. This gure is close o he respecive long run soluion (for he case of Greece) in Angelopoulos e al. (2009). The ime discoun facor,, is calibraed using he Euler equaion (eq. 32). This is wrien in he following way: = C+1 + G c +1 C + G c 1+ c 1+ c +1 1 (1 ) N+1 h L +1 N h L ( 1)(1 ) 1 + (1 k +1)( p Y +1 K +1 p ) (44) 11 Of course, public and privae consumpion goods can also be complemens (see e.g. Fiorio and Kollinzas (2004)). We follow mos of he relevan lieraure by reaing public consumpion as eiher a wase of resources or subsiue o privae consumpion. 14

16 Given ime series for C, G c, N, L, c, Y, K and values for he parameers,,, h, p and p, we ake he average of equaion (44) over he period and we compue a value for he ime discoun facor equal o , 0.10 and As was he case wih he parameer hese values correspond o he hree experimen of our model. Finally, we se g A and g N equal o and respecively. The former corresponds o a value of 1.02 for g 1 1 p g A while he laer is he average ( ) value of he working age populaion in Greece. Our model s calibraed parameer values are summarized in Table 1: (Inser Table 1 abou here) 3.6 Consrucion of variables, n and A Ren seeking echnology and fracion of producive ime To consruc series for he exogenous variables, and A, we follow he real business cycles (RBC) mehodology radiion and use our model s equaions. Given he speci c aggregae producion funcion, i.e., Y = A K p (K g ) g (n L ) 1 p g, o produce series for TFP, A, we need o have a our disposal series for Y, K, K g, n, L and values for p and g. Having, daa for Y and L (from OECD daabase), consruced series for K and K g, and calibraed values for p and g, he only missing variable is he households fracion of producive ime, n. To consruc series for n, along wih series for he echnology variable ha ransforms ren seeking e or o ren exracion, ha is,, we use equaions (23) (31), (33) and (36). More speci cally, he variable n is compued using he following equaion: n = (1 l )(1 p g ) Y L R N (45) The economic raionale ha lies behind equaion (45) has as follows: ceeris paribus, an increase in he e ecive ax rae on labour income induces households o decrease heir fracion of producive ime for wo reasons. Firs, i decreases he compensaion of producive work and second, i increases he conesable prize (hrough an increase in ax revenues) which is available for ren exracion. On he oher hand, an increase in he level of ren seeking echnology,, makes he exracion of public rens less cosly and herefore creaes incenives for households o decrease heir fracion of producive ime. 12 In Figure 5 we presen he pahs, from 1973 o 2013, for he echnology variable ha ransforms ren seeking e or o ren exracion and for households fracion of producive ime. Given he equaions ha we use o consruc series for he ren seeking echnology variable, (eq. 23, 31, 33 and 36), is value depends, among oher variables and parameers, on he value of he subsiuabiliy parameer (sp),. Since we examine hree di eren speci caions for his parameer we also have o produce hree di eren series for, n and 12 The series for he variable of ax revenues, R, is consruced using equaion (57), series for Y, C, K, c, l, k and calibraed values for p, g and p. 15

17 consequenly for A. As Figure 5 depics he variables and n follow he same general pah under he hree speci caions. In erms of he pah of he ren seeking echnology variable (see Figure 5(a)) we observe ha during he period here was a decline in is index value (base year 1973=) from o ( = 0), ( = 0:5) and ( = 1). This pah was a resul of a seep decrease during hree subperiods, ha is, mid-1970s, mid-19s and mid-19s. Excepions o ha general declining pah were he subperiods and During he former here was an increase by 4.23 index unis ( = 0), 4.64 ( = 0:5) and 5.30 ( = 1), while during he laer he increase was 9.32 ( = 0), 8.64 ( = 0:5) and 8.27 ( = 1). Finally, from 2000 o 2013, wih an excepion of he period (a drop by 5.37 index unis ( = 0), 4.62 ( = 0:5) and 4.11 ( = 1) ), we observe an increase by index unis ( = 0), ( = 0:5) and 9.16 ( = 1). (Inser Figure 5 abou here) In wha concerns he pah of households fracion of producive ime, afer reaching a value of almos % in he lae 1970s (peak in 1978, 88.82% ( = 0), 89.32% ( = 0:5) and 89.63% ( = 1)) i abruply decreased during he subperiod (in 1982, 76.49% ( = 0), 76.83% ( = 0:5) and 77.03% ( = 1)). Then, unil 1991, i oscillaed around a mean of approximaely 79% and aferwards i experienced is second seep decrease from 81.55% ( = 0), 82.23% ( = 0:5) and 82.70% ( = 1) in 1991 o 71.24% ( = 0), 71.57% ( = 0:5) and 71.77% ( = 1) in 19. Hence, according o our model s equaions and he daa, during he crisis phase ( ) of he Greek grea depression episode here was a cumulaive drop in households fracion of producive ime by approximaely 18 percenage poins, i.e. in 1979 for every 60 minues of recorded non leisure hours, 6.60 minues were consumed for non producive uses (ques of privileges from he governmen, R ) while in 19 he same gure was almos ripled o minues. Since ha period was marked by a major drop in Greek economy s TFP (see Figure 1(c)) he above analysis can serve as a candidae facor in explaining ha change (see he nex subsecion wih he growh accouning exercise). During he nex 18 years ( ) households fracion of producive ime ucuaed around a mean of 68% wih no negligible variaions. Looking a he souheas side of Figure 5(b) we observe wo subperiods of a major decline and wo subperiods of a sharp increase. More speci cally, from 73.66% ( = 0), 73.77% ( = 0:5) and 73.% ( = 1) in 1997 households fracion of producive ime fell o 63.60% ( = 0), 62.13% ( = 0:5) and 61.00% ( = 1) in Then, afer increasing o 71.29% ( = 0), 68.26% ( = 0:5) and 66.05% ( = 1) in 2007 i once again decreased o levels close o 60% in 2011 (61.89% ( = 0), 61.67% ( = 0:5) and 61.45% ( = 1)). Finally, in 2013 i jumped o 67.63% ( = 0), 67.98% ( = 0:5) and 68.20% ( = 1). (Inser Table 2 abou here) 16

18 Alhough our research ineres focuses on he comparison beween he equilibrium pahs of he endogenous variables of our model wih hose in he daa, in Table 2 we presen he long-run soluions (hree experimens) of our model wih respec o he following hree endogenous variables: households fracion of producive ime, n, economy-wide degree of ren exracion,, and exraced public rens as a percenage of GDP, R Y. Our calibraed o he Greek economy model suggess ha households devoe 70.29% ( = 0), 73.24% ( = 0:5) and 78.86% ( = 1) of heir non leisure ime o producive uses and he economywide degree of ren exracion akes he values of 41.85% ( = 0), 36.38% ( = 0:5) and 26.% ( = 1). The numbers of he laer variable ranslae o favoured public spending and ax privileges equal o 15.62% ( = 0), 13.50% ( = 0:5) and 9.91% ( = 1) as a percenage of GDP. Finally, i is worh poining ou ha according o our model s longrun soluions here exiss an inverse relaionship beween he value of he subsiuabiliy parameer, i.e.,, and ren seeking aciviy. The higher he former, ha is, he degree of subsiuabiliy beween privae and public consumpion goods increases, he lower he laer, ha is, households increase heir fracion of producive ime and he economy-wide degree of ren exracion decreases O cial vs model based indices: he case for he exogenous variable As menioned in he former subsecion, when we simulae our ari cial economy, he series for he exogenous variable,, ha we feed ino our model, is consruced using our model s equaions and he daa. seeking per capia e or, i.e., The ren seeking echnology variable shows how "easily" ren PN (1 n h )L h h=1 N ranslaes ino ren exracion, i.e.. Hence, he exogenous variable,, can be considered as a proxy for he qualiy of insiuions of he economy. Given ren seeking per capia e or, a higher value for (lower insiuional qualiy) indicaes higher ren exracion. Before using he consruced series of o simulae our model economy, i would be fruiful for our analysis o ask wheher he aforemenioned series, presened in Figure 5(a) and reproduced in Figure 6, display any resemblance wih available indices ha can be considered as proxies for he qualiy of insiuions of he Greek economy. An a rmaive answer o ha quesion would give suppor, parially a leas, o our choice o use he speci c series for he exogenous variable. In order o address his issue we presen wo widely used indices. These are: he Inernaional Counry Risk Guide (ICRG) index consruced by a privae rm named Poliical Risk Services (PRS) Group Inc., and he Corrupion Percepions Index (CPI) produced by Transparency Inernaional a non-governmenal organizaion ha moniors corrupion for a big sample of counries (e.g. 177 counries for he 2013 ediion). 13 For he former index he daa are available for he period while for he laer hey are available for he period (Inser Figure 6 abou here) 13 Useful informaion abou hese wo indices (mehodology ec.) can be found a he following wo inerne sies: for he ICRG index, and for he CPI index, 17

19 The ICRG daase includes 22 variables in hree subcaegories. These are: he poliical, he nancial and he economic risk subcaegory. As Angelopoulos e al. (2011) poin ou many economiss have used he poliical risk subcaegory as a measure of he qualiy of a counry s insiuions. This subcaegory akes values beween 0 (highes poliical risk) and (lowes poliical risk) and includes 12 variables. These are: governmen sabiliy, socioeconomic condiions, invesmen pro le, inernal con ic, exernal con ic, corrupion, miliary in poliics, religious ensions, law and order, ehnic ensions, democraic accounabiliy and bureaucracy qualiy. The rs 5 variables ake values beween 0 (min) o 12 (max), he following 6 beween 0 (min) and 6 (max) and he las one beween 0 (min) and 4 (max). The sum of he values of hese variables leads o he formaion of he poliical risk subcaegory index. Given ha a higher value of his index can be inerpreed as an improvemen in he qualiy of a counry s insiuions while for our model s ren seeking echnology variable a higher value indicaes he opposie (a lower qualiy of insiuions), o compare he wo series we ake he reciprocal of he poliical risk index. Furhermore, we do no sum up all he welve subcomponens bu insead we choose he following 5: governmen sabiliy, invesmen pro le, corrupion, democraic accounabiliy and bureaucracy qualiy. We consruc wo indices, one from he ICRG daase and one from he consruced series of he variable, wih 1984 as he base year. The wo indices are presened in Figure 6(a). We observe ha he ICRG index follows a pah very similar o he one ha our model s ren seeking echnology index follows during he period I displays boh he downward pah of he 19s and he reverse of ha rend in he 2000s. Furhermore, he correlaion coe cien is equal o 0. (if insead of 5 we sum up all he 12 variables of he poliical risk index hen he correlaion coe cien drops o 0.82). The oher o cial index which can be considered as a proxy for he qualiy of a counry s insiuions is he CPI. According o Transparency Inernaional he CPI "ranks counries and erriories based on how corrup heir public secor is perceived o be. A counry or erriory s score indicaes he perceived level of public secor corrupion on a scale of 0 (highly corrup) o (very clean)". 14 Furhermore, he CPI generally de nes corrupion as "he misuse of public power for privae bene ". As was he case wih he ICRG index we mus ake he reciprocal of he CPI so as o make i comparable wih he ren seeking echnology variable of our model. In Figure 6(b) we display he wo series from 19 o 2013 (base year 19). Alhough he correlaion coe cien beween he wo indices is very weak (bu posiive), i.e. 0.15, here are some subperiods where he CPI follows a similar pah like he one ha he variable follows (e.g , , and ). On he conrary, during he subperiods , and he wo indices follow pahs wih enirely opposie direcions. Generally speaking he above analysis reveals a similariy beween he variabiliy of he ren seeking echnology variable and ha of a wo o cial indices ha can be considered as 14 For example, in 2013, Greece s CPI score was 40 (rank: h ou of a sample of 177 counries). 18

20 proxies for he qualiy of a counry s insiuions. Mos imporan of all, hese wo indices, i.e. ICRG and CPI, are enirely exogenous o our model. This fac gives suppor o our choice of choosing our model based series for he exogenous variable Toal facor produciviy Having ime series for Y, K, K g, n, L and values for p and g, we compue he TFP series using he aggregae producion funcion. As in Conesa e al. (2007), he exogenous TFP series which we feed ino our model is obained using as a series for oupu, real GDP a facor prices. We do ha because we wan our TFP exogenous series o be ne of ne indirec axes. These axes are modeled explicily wih he use of he e ecive ax rae on privae consumpion expendiures, c. As a resul: A = Y K p (K g ) g (n L ) 1 p g (46) In he growh accouning exercise, when we repor he conribuion of TFP o growh we calculae TFP as convenionally measured, ha is using real GDP a marke prices, hus: by = (1 + c T )C + I + G c + G i (47) The resuling TFP series is as follows: ca = by K p (K g ) g (n L ) 1 (48) p g where T is he base year (for Greece his is 2005). 3.7 Growh accouning In order o perform he growh accouning exercise we modify he aggregae producion (e.g. see Kehoe and Presco (2002, 2007)) in he following way: Y or in naural logarihms N = A 1 1 p g K Y p 1 p g K g Y g 1 p g n L N (49) ln Y N = 1 1 p g ln A + p 1 p g ln K Y + g 1 p g ln Kg Y + ln n L N (50) wih ln n L N = ln n + ln L N (51) 19

21 where A 1 1 p g is he TFP facor, K Y p 1 p g is he privae capial facor, K g g 1 p g Y he public capial facor and nl N is he labour facor. The laer facor (per capia hours of producive work) can be divided ino wo erms, he fracion of producive ime, n, and per capia non leisure ime, L N. In he absence of shocks our model economy converges o a balanced growh pah. Along ha pah he privae capial facor, he public capial facor and he labour facor remain consan (he fracion of producive ime and per capia non leisure ime remain consan). As a resul, he growh rae of real per capial GDP is driven exclusively by he growh rae of he TFP facor, ha is, g 1 1 p g A. In Table 3 we presen he growh accouning exercise. We divide he period ino 5 subperiods, hese are: (before depression), (crisis), (recovery), (pos depression) and (new crisis). Taking annual di erences of equaion (50) we compue he growh rae of real per capia GDP as he sum of he growh rae of he TFP facor (ne of he fracion of producive ime n ), he privae capial facor, he public capial facor and he labour facor. Furhermore, using equaion (51), we compue he growh rae of he labour facor as he sum of he growh rae of he fracion of producive ime and per capia non leisure ime. Since we examine hree di eren cases wih respec o he subsiuabiliy parameer (our choice for a ecs he variable n and as a resul i also a ecs n L and A, e.g. see eq. (46)) we presen hree, parially di eren, growh accouning exercises. There he average annual growh rae of real per capia GDP, he privae capial facor, he public capial facor and per capia non leisure ime is he same in all hree cases (we use he symbol -//- o denoe ha he value of a variable remains he same across he columns of Table 3). On he oher hand, he average annual growh rae of he TFP facor (ne), he labour facor and he fracion of producive ime akes di eren values in all hree speci caions. The erm TFP Facor (gross, i.e., including he fracion of producive ime) refers o he respecive growh accouning exercise when he producion funcion does no includes he variable n, i.e., Y = A K p (K g ) g L 1 p g. Tha was he case in Gogos e al. (2014b). Under ha seing he growh rae of per capia non leisure ime coincided wih ha of he labour facor, i.e. all hours of work (non leisure ime) were considered as producive. Hence, any variaions in he fracion of producive ime showed up as variaions in he TFP facor (gross). The growh accouning seing ha we adop in his sudy (based on he model of Angelopoulos e al. (2009)) helps us o move our research one sep furher since i allows us o idenify and quanify a proporion of he sources of he variabiliy in he TFP facor (gross) observed in Gogos e al. (2014b), i.e. he "measure of our ignorance" unfolds. Looking a Table 3 we observe ha during he whole period he average annual growh rae of real per capia GDP was less han half of he 2% rend, i.e. 0.75%. This poor growh performance was a resul of a negaive growh rae -1.10% ( = 0), -1.14% ( = 0:5) and -1.23% ( = 1) of he labour facor and of a very weak bu posiive conribuion 0.17% ( = 0), 0.21% ( = 0:5) and 0.29% ( = 1) of he TFP facor (ne). I is worh noing is 20

22 ha he decline of he labour facor was produced by a negaive average annual growh rae of he fracion of producive ime (-0.54% ( = 0), -0.58% ( = 0:5) and -0.67% ( = 1)) and of he per capia non leisure ime (-0.56%). The main engine of growh was he privae capial facor wih an average annual growh rae of 1.58%. The conribuion of he public capial facor was of he same magniude as ha of he TFP facor (ne), i.e., 0.11%. The subperiod (before depression) was marked by a growh performance (2.13%) close o he 2% rend. The conribuion of he privae capial facor, he public capial facor and he labour facor was 3.50%, 0.11% and 0.27% ( = 0), 0.01% ( = 0:5) and -0.51% ( = 1), respecively. On he oher hand he average annual growh rae of he TFP facor (ne) was -1.75% ( = 0), -1.49% ( = 0:5) and -0.97% ( = 1). Hence, he posiive growh rae of he privae capial facor fully o seed he negaive growh rae of he TFP facor and ha led o an increase of real per capia GDP. (Inser Figure 7 abou here) During he crisis phase ( ) of he Greek grea depression episode he average annual growh rae of real per capia GDP was -0.07%. The conribuion of he labour facor was negaive wih an average annual growh rae of -1.% ( = 0), -1.91% ( = 0:5) and -1.93% ( = 1). This was a resul of a decrease of he fracion of producive ime by -1.35% ( = 0), -1.36% ( = 0:5) and -1.39% ( = 1) and of a decline of he per capia non leisure ime by -0.54%. The conribuion of he privae and he public capial facor was posiive wih an average annual growh rae of 1.68% and 0.12% respecively. Furhermore, he average annual growh rae of he TFP facor (ne) was close o zero, i.e., 0.03% ( = 0), 0.04% ( = 0:5) and 0.06% ( = 1). In he respecive growh accouning exercise in Gogos e al (2014b), he conribuion of he TFP facor (gross) was -1.33% (see he row TFP Facor (gross) on he norheas side of Table 3). Hence, according o our new growh accouning exercise, on average, during he period , 40.84% ( = 0), 41.14% ( = 0:5) and 41.74% ( = 1) of he gap beween he growh rae of he TFP facor (gross) and he 2% rend can be aribued o ren seeking aciviies (see Figure 7(c)). The subperiod , i.e. he recovery phase, was marked by an aggregae economic performance well above he 2% rend growh rae. More speci cally he average annual growh rae of real per capia GDP was 3.13%. The main engine of growh was he TFP facor (ne) wih an average annual growh rae of 3.43% ( = 0), 4.15% ( = 0:5) and 4.70% ( = 1). Under he speci caions = 0 and = 0:5 he conribuion of he labour facor was posiive (0.93% and 0.20%) whereas under he speci caion = 1 i was negaive (-0.34%). These di erences, given he average increase of he per capia non leisure ime (0.75%), sem from he pah of households fracion of producive ime. Under he rs speci caion i experienced an average annual growh rae of 0.18%, while he respecive gures under he oher wo speci caions were -0.55% and -1.09%. Finally, he conribuion of he privae and he public capial facor urned negaive wih an average annual growh rae of -1.20% and -0.03% respecively. For his paricular subperiod ren seeking aciviies 21

23 can no explain he gap of 1.52 percenage poins beween he growh rae of he TFP facor (gross) and he 2% rend (see Figure 7(d)). On he conrary, according o our new growh accouning exercise ha gap now becomes wider (wih an excepion of he speci caion = 0), i.e., 1.43% ( = 0), 2.15% ( = 0:5) and 2.70% ( = 1). The supberiod is close o be characerized as one of a balanced growh pah. The average annual growh rae of real per capia GDP was 3.83% and he workhorse for his economic performance was he TFP facor (ne) wih a conribuion of 3.99% ( = 0), 4.06% ( = 0:5) and 4.11% ( = 1). The privae and he public capial facor coninued heir declining pah wih an average annual growh rae of -0.60% (half of he respecive gure in he subperiod) and -0.02% respecively. On he oher hand he conribuion of he labour facor was posiive wih an average annual growh rae of 0.47% ( = 0), 0.40% ( = 0:5) and 0.35% ( = 1). This was a resul of a posiive average annual growh rae of he per capia non leisure ime of 0.64%. The respecive gure for he fracion of producive ime was -0.17% ( = 0), -0.24% ( = 0:5) and -0.29% ( = 1). (Inser Table 3 abou here) The subperiod was marked by an abrup fall of real per capia GDP. The average annual growh rae was -3.88%. This seep conracion in aggregae economic aciviy was a resul of wo facors. Firs, he TFP facor (ne) experienced a decline of -4.64% ( = 0), -5.45% ( = 0:5) and -6.05% ( = 1) and second, he labour facor decreased by -3.96% ( = 0), -3.15% ( = 0:5) and -2.55% ( = 1). The decline of he labour facor was mosly produced by he decrease of he per capia non leisure ime (-3.08%). The average annual growh rae of he fracion of producive ime was -0.88% ( = 0), -0.07% ( = 0:5) and 0.53% ( = 1). Finally, he privae and he public capial facor had a posiive conribuion o real per capia GDP growh of 4.37% and 0.34% respecively. The main quesion ha we address in his sudy is wheher he observed exogenous series of TFP, A, he ren seeking echnology variable (a proxy for he qualiy of insiuions), he e ecive ax raes, c, l, k, he public secor GDP componens, G c, G i and populaion, N, can accoun for he aforemenioned growh accouning characerisics presened in Table 3. The answer is a rmaive. Our model performs well vis-a-vis he daa. Furhermore, a non negligible proporion of he decline of he TFP facor (gross) observed in Gogos e al. (2014b), is endogenized and is aribued o ren seeking aciviies 4 Solving for he DCE pah Afer doing some algebra we end up wih he following six equaions in six unknowns, i.e.,y, C, L, K +1, K g +1 and R (in aggregae erms), in each period : Y = A K p (K g ) g 1 p+g! 1 p g (1 l p+g )(1 p g ) R N 22 (52)