The Dynamics of Development: Entrepreneurship, Innovation, and Reallocation

Roberto Fattal Jaef and Francisco Buera

No 274, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: Development dynamics are characterized by sustained improvements in TFP, protracted increases in investment rates, and a broad transformation in the structure of production. Low income countries are characterized by small average firm size, slow firm growth over the life-cycle, and significant dispersion of marginal products. In this paper we present a quantitative theory that jointly matches the behavior of firms in under-developed economies and key properties of development paths. We work with a model that features endogenous innovation decisions by entrepreneurs, reallocation of factors due to idiosyncratic productivity shocks, and selection in and out of entrepreneurship. We construct a low-TFP stationary equilibrium with dispersion in marginal products that is driven by idiosyncratic distortions. We then trigger development through a reform that liberalizes the economy from all frictions. Our quantitative theory can account well for cross-sectional and life-cycle patterns in distorted economies, and can generate development paths with rising TFP and investment dynamics, consistent with the data. Ignoring either endogenous innovation or selection in and out of entrepreneurship would lead to counter-factual transition paths, similar to those of the standard neoclassical growth model.

Date: 2015
New Economics Papers: this item is included in nep-bec, nep-cse, nep-dge, nep-ent, nep-gro, nep-ino, nep-sbm and nep-tid
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:274

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