The New Paradigm Papers of the Month of June

The Social Returns to Public R&D

Andrew Fieldhouse, Karel Mertens

Public R&D funding pays off. Fieldhouse and Mertens provide strong causal evidence that federal nondefense R&D spending significantly boosts private-sector productivity. Their estimates suggest that the R&D investments outlined in the CHIPS and Science Act could increase U.S. productivity by 0.2–0.4% over the next decade—translating to output gains of more than $40 billion per year. This would exceed the total R&D spending under the Act. The study also warns that future budget consolidations cutting nondefense R&D could come with heavy economic costs.

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Trade and Industrial Policy in Supply Chains

Laura Alfaro, Harald Fadinger, Jan Schymik, Gede Virananda

Domestically motivated industrial policies and trade restrictions do not stop at borders. Instead, they can drive innovation abroad. This study examines the effects of China’s export restrictions on rare earth elements (REEs), critical inputs for advanced manufacturing. The authors find that these policies spurred innovation and exports in REE-intensive sectors outside of China. Using patent data and a global trade model, they show that REEs are complementary inputs, and that supply restrictions can unintentionally accelerate technological progress in other countries.

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Culture, Institutions, and Social Equilibria: A Framework

Daron Acemoglu, James Robinson

Culture doesn’t just evolve, it can change in leaps. Acemoglu and Robinson propose a framework in which cultural attributes interact dynamically with institutions, sometimes undergoing sudden “saltational” shifts. These cultural shifts help explain how societies adapt to political upheaval or crisis. By treating culture as a system of interconnected traits, the model offers new insight into how political and social outcomes co-evolve.

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Irrational Inattention

Ciril Bosch-Rosa, Muhammed Bulutay, Bernhard Kassner

Why do people ignore useful information? This paper introduces irrational inattention, where people’s overconfidence in their existing beliefs — known as overprecision — leads them to undervalue new information. Experimental results show that this bias causes suboptimal decisions, particularly when information is complex. Feedback that reduces overconfidence improves outcomes, suggesting potential interventions for better decision-making in fields like finance, policy, or consumer behavior.

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The Optimal Macro Tariff

Oleg Itskhoki, Dmitry Mukhin

Tariffs are more than trade tools — they are macroeconomic levers. Itskhoki and Mukhin develop a model to determine the optimal US tariff in light of fiscal goals, trade imbalances, and the peculiar external financial position of the US known as ‘exorbitant privilege’. They show that its large foreign liabilities reduce the optimal tariff from 34% to just 9%. In this model, the adjustment of the dollar — not trade imbalances — are essential to closing trade deficits.

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