Working Paper: NBER ID: w29333
Authors: Michael Peters; Fabrizio Zilibotti
Abstract: We construct a model of creative destruction with endogenous firm dynamics. We integrate the theory into a general equilibrium multi-country model of technological convergence where countries interact via international spillovers. We derive implications for both firm dynamics and aggregate productivity dynamics. In richer economies, firms are on average larger and the best firms grow larger over time. In poorer economies, there is little creative destruction, low selection, and firms remain small. We estimate the parameters of the model using firm-level data for India and the United States. We study the effect of counterfactual policy reforms. Industrial policy that selectively targets the more productive firms can be beneficial in poor countries while being harmful in countries close to the economic frontier. The findings echo Acemoglu et al. (2006).
Keywords: Creative Destruction; Economic Development; Firm Dynamics; Technological Convergence
JEL Codes: O12; O40; O43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic development (O29) | firm size dynamics (L25) |
| firm size dynamics (L25) | economic development (O29) |
| low creative destruction (O39) | predominance of smaller firms (L25) |
| predominance of smaller firms (L25) | underdevelopment (O11) |
| selective industrial policies targeting productive firms (O25) | economic growth in poorer countries (F63) |
| selective industrial policies targeting productive firms (O25) | detrimental effects in economies near technology frontier (O49) |
| creative destruction (O39) | economic growth (O49) |
| human capital and entrepreneurial capabilities (J24) | creative destruction (O39) |
| creative destruction (O39) | overall productivity growth (O49) |