Working Paper: NBER ID: w14965
Authors: Pravin Krishna; Andrei A. Levchenko
Abstract: Less developed countries tend to experience higher output volatility, a fact that is, in part, explained by their specialization in more volatile sectors. This paper proposes theoretical explanations for this pattern of specialization -- with the complexity of the goods playing a central role. Specifically, less developed countries with low levels of human capital, or alternately, with lower institutional ability to enforce contracts, will specialize in less complex goods which are also characterized by higher levels of output volatility. We provide novel empirical evidence that less complex industries are indeed more volatile.
Keywords: Comparative Advantage; Economic Volatility; Product Complexity
JEL Codes: F1; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower human capital (J24) | specialization in less complex goods (L69) |
| specialization in less complex goods (L69) | higher output volatility (E39) |
| lower human capital (J24) | higher output volatility (E39) |
| complexity of goods (L15) | lower output volatility (E39) |
| complexity of goods (L15) | output volatility (E23) |