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The Market Size Effect in Endogenous Growth Reconsidered

Hélène Latzer (), Kiminori Matsuyama () and Mathieu Parenti
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Hélène Latzer: CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, CEREC - Université Saint-Louis - Bruxelles
Kiminori Matsuyama: Northwestern University [Evanston]
Mathieu Parenti: ULB - Université Libre de Bruxelles [Bruxelles]

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: This paper aims at disentangling two effects of the labor supply size on long-run growth that are traditionally undistinguishable under preference homotheticity: a scale effect, and a market size effect. To reach this goal, we present two horizontal-innovation models of endogenous growth with non-homothetic preferences. We demonstrate in particular that in such set-ups, keeping the economy's total effective labor supply constant, a "richer" country (i.e., with higher labor productivity and a smaller labor force) grows faster than a "poorer" country (i.e., with lower labor productivity and a larger labor force), leading the two countries to diverge.

Keywords: Divergence; Horizontal Innovation; Knowledge Spillover; Endogenous Growth; Balanced Growth Path; Variable price elasticity; Endogenous Markup; Nonhomotheticity; Direct Explicit Additivity; Indirect Explicit Additivity (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-gro
Date: 2018-10
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Published in 2018

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