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Big Push in Distorted Economies

Francisco Buera (), Hugo A. Hopenhayn, Yongseok Shin and Nicholas Trachter

No 21-07, Working Paper from Federal Reserve Bank of Richmond

Abstract: Why don't poor countries adopt more productive technologies? Is there a role for policies that coordinate technology adoption? To answer these questions, we develop a quantitative model that features complementarity in firms' technology adoption decisions: The gains from adoption are larger when more firms adopt. When this complementarity is strong, multiple equilibria and hence coordination failures are possible. More importantly, even without equilibrium multiplicity, the model elements responsible for the complementarity can substantially amplify the effect of distortions and policies. In what we call the Big Push region, the impact of idiosyncratic distortions is over three times larger than in models without such complementarity. This amplification enables our model to nearly fully account for the income gap between India and the United States without coordination failures playing a role.

Pages: 51
Date: 2021-03-26
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DOI: 10.21144/wp21-07

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