Working Paper: NBER ID: w9066
Authors: Daron Acemoglu; Philippe Aghion; Fabrizio Zilibotti
Abstract: We analyze an economy where managers engage both in the adaptation of technologies from the world frontier and in innovation activities. The selection of high-skill managers is more important for innovation activities. As the economy approaches the technology frontier, selection becomes more important. As a result, countires at early stages of development pursue an investment-based strategy, with long term relationships, high average size and age of firms, large average investments, but little selection. Closer to the world technology frontier, there is a switch to innovation-based strategy with short-term relationships, younger firms, less investment and better selection of managers. We show that relatively backward economies may switch out of the investment-based strategy too soon, so certain economic institutions and policies, such as limits on product market competition or investment subsidies, that encourage the investment-based strategy may be beneficial. However, societies that cannot switch out of the investment-based strategy fail to converge to the world technology frontier. Non-convergence traps are more likely when policies and institutions are endogenized, enabling beneficiaries of existing policies to bribe politicians to maintain these policies.
Keywords: No keywords provided
JEL Codes: O31; O33; O38; O40; L16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investment-based strategy (G11) | Short-term growth (D25) |
| Approaching technology frontier (O49) | Necessity for innovation-based strategy (O35) |
| High-skill managers (J24) | Sustaining growth (O44) |
| Investment-based strategy (G11) | Innovation-based strategy (switch) (O35) |
| Failure to switch to innovation-based strategy (O39) | Stagnation and non-convergence (D50) |
| Limits on product market competition (L13) | Encouraging investment (F21) |
| Monopolistic practices (L12) | Barriers to necessary changes (O30) |