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Technological Diversification

Miklós Koren and Silvana Tenreyro ()

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: Economies at early stages of development are often shaken by abrupt changes in growth rates, whereas in advanced economies growth rates tend to be relatively stable. To explain this pattern, we propose a theory of technological diversification. Production makes use of different input varieties, which are subject to imperfectly correlated shocks. Technological progress takes the form of an increase in the number of varieties, raising average productivity. In addition, the expansion in the number of varieties in our model provides diversification benefits against variety-specific shocks and it can hence lower the volatility of output growth. Technological complexity evolves endogenously in response to profit incentives. The decline in volatility thus arises as a by-product of firms' incentives to increase profits and is hence a likely outcome of the development process. We quantitatively asses the predictions of the model in light of the empirical evidence and find th at for reasonable parameter values, the model can generate a decline in volatility with the level of development comparable to that in the data.

Keywords: volatility; endogenous growth; diversification; technological progress (search for similar items in EconPapers)
JEL-codes: O0 O10 O11 O12 O30 O40 O47 (search for similar items in EconPapers)
Date: 2007-10
New Economics Papers: this item is included in nep-dev
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Related works:
Journal Article: Technological Diversification (2013) Downloads
Working Paper: Technological diversification (2013) Downloads
Journal Article: Technological diversification (2007) Downloads
Working Paper: Technological Diversification (2007) Downloads
Working Paper: Technological diversification (2007) Downloads
Working Paper: Technological diversification (2005) Downloads
Working Paper: Technological Diversification (2005) Downloads
Working Paper: Technological diversification (2004) Downloads
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