Economic Growth

February 12, 2009
Matthias Doepke and Benjamin Jones, Organizers

Michele Boldrin, Washington University, and David K. Levine, NBER and Washington University
Quality Ladders, Competition and Endogenous Growth

Boldrin and Levine examine a theory of competitive innovation in which new ideas are introduced only when the use of existing ideas produces diminishing returns. After an idea is introduced, the knowledge capital associated with that idea expands and its value falls. Once the value falls far enough, it becomes profitable to introduce a new idea. The resulting theory is consistent with fixed costs of innovation and it accounts for the same facts as the existing theory of monopolistic innovation. However, there is evidence that innovation frequently takes place in the absence of monopoly power and that it is driven by diminishing returns on existing ideas – two facts that the existing theory cannot explain.

Diego Comin, NBER and Harvard Business School, and Bart Hobijn, Federal Reserve Bank of San Francisco, An Exploration of Technology Diffusion

Comin and Hobijn develop a model that, at the aggregate level, is similar to the one-sector neoclassical growth model while, at the disaggregate level, has implications for the path of observable measures of technology adoption. The authors estimate the model using data on the diffusion of 15 technologies in 166 countries over the last two centuries, and evaluate the implications of these estimates for aggregate Total Factor Productivity and per capita income. Their results reveal that, on average, countries have adopted technologies 47 years after their invention. There is substantial variation across technologies and countries. Over the past two centuries, newer technologies have been adopted faster than old ones. The cross-country variation in the adoption of technologies accounts for at least one quarter of differences in per capita income.

Alexander Monge, Pennsylvania State University,Foreign Firms, Domestic Entrepreneurial Skills and Development

Foreign firms may enhance a developing country’s formation of know-how by exposing local entrepreneurs to, or directly transferring to them, the productive ideas of developed countries. However, foreign firms also may reduce domestic entrepreneurs’ incentives to accumulate know-how by increasing competition and reducing the returns to entrepreneurial skills. Monge shows that if externalities drive the formation of skills, then after openness, initial conditions will determine whether a country converges to one of two steady states or exhibits non-monotonic dynamics. If, instead, the costs and benefits of skill formation are fully internalized, then openness gradually will remove the pre-existing sector, generate a new sector of domestic firms, and the country will catch up with developed countries. In both models, convergence requires the destruction of pre-existent firms.

Alice Schoonbroodt, University of Southampton, and Michele Tertilt, NBER and Stanford University, Who Owns Children and Does It Matter?

Most countries seem to have experienced a shift in property rights regarding children. While parents two centuries ago had extensive control over their children, in many countries laws have since been implemented to curb these control rights, essentially leading to the self-ownership of children. Schoonbroodt and Tertilt document these changes and argue that the allocation of property rights alters the incentive to have children, and thus may have contributed to the decline in fertility observed in the data. Further, they show that the lack of property rights of parents over children today indeed may lead to inefficiently low levels of fertility. This is an interesting breakdown of Coase’s theorem, and the authors provide a detailed analysis of the mechanism responsible for that breakdown. That mechanism holds in a variety of environments: with altruism, overlapping lives, heterogeneity, and infinite horizons. Finally, the authors address two additional issues. First, they relate the efficiency results to previous efficiency results in models with and without altruism and with and without fertility choice. Second, they analyze potential policy options to preserve the sovereignty of children, including government debt and a Pay-As-You-Go social security system, both of which need to be designed so as not to distort fertility decisions.

Francesco Caselli, NBER and London School of Economics, and Guy Michaels, London School of Economics, Resource Abundance, Development, and Living Standards: Evidence from Oil Discoveries in Brazil

Caselli and Michaels exploit variation in oil abundance among Brazilian municipalities to investigate the effects of resource windfalls. They find muted effects of oil on market outcomes: offshore oil has no effect on aggregate non-oil GDP or its composition at the municipality level, while onshore oil has only a modest effect on its composition. However, oil abundance causes municipal revenues and reported spending to increase substantially, mainly as a result of royalties paid by Petrobras. Nevertheless, survey-based measures of social transfers, public good provision, and infrastructure increase much less – if at all – than one might expect given the increase in reporting spending. The same is true for household income. The authors tentatively conclude that much of the oil money flowing to municipal governments goes missing.

Hyeok Jeong, Vanderbilt University, and Yong Kim, University of Southern California,Complementarity and Transition to Modern Economic Growth

In developing countries, income per capita typically remains stagnant for long periods before taking-off. Jeong and Kim study this as the outcome of a gradual transition of the workforce from traditional to modern sectors. While exogenous productivity growth is only present in the modern sector, the transition to the modern sector is gradual because work experience is sector-specific and complements labor. This generates S-shaped income growth for the dual economy, the effect of which enters into Total Factor Productivity in an aggregate production function. The authors measure the theory using nationally representative microdata from Thailand in 1976-96. They estimate technology parameters using the cross-sectional earnings equations implied by the model. They find that the model simulated at these estimates captures well the nonlinear dynamics of aggregate earnings growth and inequality in Thailand.

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