Working Paper: CEPR ID: DP6523
Authors: Mikls Koren; Silvana Tenreyro
Abstract: Economies at early stages of development are often shaken by abrupt changes in growth rates, whereas in advanced economies growth rates tend to be relatively stable. To explain this pattern, we propose a theory of technological diversification. Production makes use of different input varieties, which are subject to imperfectly correlated shocks. Technological progress takes the form of an increase in the number of varieties, raising average productivity. In addition, the expansion in the number of varieties in our model provides diversification benefits against variety-specific shocks and it can hence lower the volatility of output growth. Technological complexity evolves endogenously in response to profit incentives. The decline in volatility thus arises as a by-product of firms' incentives to increase profits and is hence a likely outcome of the development process. We quantitatively asses the predictions of the model in light of the empirical evidence and find that for reasonable parameter values, the model can generate a decline in volatility with the level of development comparable to that in the data.
Keywords: development; endogenous growth; technological diversification; volatility
JEL Codes: O30; O31; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in the number of input varieties (C67) | decrease in the volatility of output growth (E32) |
| larger number of inputs (C39) | individual impact on productivity diminishes (J29) |
| firms can adjust their use of alternative inputs (D21) | offset shocks affecting specific inputs (D57) |
| development process (O39) | decline in volatility (E32) |
| countries develop and adopt more varieties (O39) | become less volatile (G40) |
| more productive firms (D21) | lower volatility (G19) |