Working Paper: CEPR ID: DP3467
Authors: Daron Acemoglu; Philippe Aghion; Fabrizio Zilibotti
Abstract: We analyse an economy where managers engage both in the adoption of technologies from the world frontier and in innovation activities. The selection of high-skill managers is more important for innovation activities. As the economy approaches the technology frontier, selection becomes more important. As a result, countries at early stages of development pursue an investment-based strategy, with long-term relationships, high average size and age of firms, large average investments, but little selection. Closer to the world technology frontier, there is a switch to an innovation-based strategy with short-term relationships, younger firms, less investment and better selection of managers. We show that relatively backward economies may switch out of the investment-based strategy too soon, so certain economic institutions and policies, such as limits on product market competition or investment subsidies, which encourage the investment-based strategy may be beneficial. Societies that cannot switch out of the investment-based strategy, however, fail to converge to the world technology frontier. Non-convergence traps are more likely when policies and institutions are endogenized, enabling beneficiaries of existing policies to bribe politicians to maintain these policies.
Keywords: appropriate institutions; convergence; economic growth; imitation; innovation; political economy of growth; selection; technical change; traps
JEL Codes: L16; O31; O33; O38; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| proximity to the technology frontier (O49) | selection of high-skill managers (M51) |
| economic institutions (D02) | strategy adopted by firms (L21) |
| strategy adopted by firms (L21) | growth outcomes (O40) |
| institutional dynamics (D02) | long-term growth trajectories (O41) |
| backward economies (P19) | switch from investment-based strategy to innovation-based strategy (O35) |
| inability to transition (P20) | failure to converge to world technology frontier (O47) |