Working Paper: CEPR ID: DP7290
Authors: Klaus Desmet; Stephen Parente
Abstract: This paper argues that an economy's transition from Malthusian stagnation to modern growth requires markets to reach a critical size, and competition to reach a critical level of intensity. By allowing an economy to produce a greater variety of goods, a larger market makes goods more substitutable, raising the price elasticity of demand, and lowering mark-ups. Firms must then become larger to break even, which facilitates amortizing the fixed costs of innovation. We demonstrate our theory in a dynamic general equilibrium model calibrated to England's long-run development and explore how various factors affect the timing of takeoff.
Keywords: competition; industrial revolution; innovation; market revolution; unified growth theory
JEL Codes: N33; O14; O33; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market Size (L25) | Variety of Goods (L15) |
| Variety of Goods (L15) | Price Elasticity of Demand (D12) |
| Price Elasticity of Demand (D12) | Markups (Y10) |
| Markups (Y10) | Firm Size (L25) |
| Firm Size (L25) | Innovation (O35) |