Working Paper: CEPR ID: DP8022
Authors: Erika Frnstrand Damsgaard; Per Krusell
Abstract: This paper builds a theory of the shape of the distribution of total-factor productivity (TFP) across countries. The data on productivity suggests vast differences across countries, and arguably even has \twin peaks". The theory proposed here is consistent with vast differences in long-run productivity, and potentially also with a twin-peaks outcome, even under the assumption that all countries are ex-ante identical. It is based on the hypothesis that TFP improvements in a given country follow a Nelson- Phelps specification. Thus, they derive from past investments in the country itself and, through a spillover (or catch-up) term, from past investments in other countries. We then construct a stochastic dynamic general equilibrium model of the world which has externalities: each country invests in TFP and internalizes the dynamic effects of its own investment, while treating other countries' investments as given. Average world growth is endogenous, as is the distribution of TFP across countries. We find that small idiosyncratic TFP shocks can lead to large long-run differences in TFP levels and that, in the long run, the world distribution of TFP across countries may be asymmetric, i.e., twin-peaked, or bimodal. More specifically, twin-peaked world distributions of TFP arise if the catch-up term in the Nelson-Phelps equation has a sufficiently low weight. If, on the other hand, technological catch-up is important, the world distribution of TFP is unimodal, though it may still have large dispersion.
Keywords: growth; inequality
JEL Codes: F43; O1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| TFP improvements in a country (O24) | TFP levels in that country (F16) |
| Past investments in a country (F21) | TFP improvements in a country (O24) |
| Spillover effects from other countries' investments (F69) | TFP improvements in a country (O24) |
| Small idiosyncratic TFP shocks (D89) | Long-run differences in TFP levels (O49) |
| Weight of the catch-up term in the Nelson-Phelps equation (C29) | TFP distribution shape (D39) |
| Low weight of the catch-up term (C69) | Asymmetric or twin-peaked TFP distribution (D39) |
| Significant technological catch-up (O33) | Unimodal TFP distribution (D39) |
| Relative position to the world technology frontier (O49) | Long-run growth rates of countries (O57) |
| Countries further behind (O57) | Faster growth due to catch-up effects (O49) |