The Theory of Economic Complexity

Cesar Augusto Hidalgo () and Viktor Stojkoski
Additional contact information
Cesar Augusto Hidalgo: IAST - Institute for Advanced Study in Toulouse, TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, University of Manchester [Manchester]
Viktor Stojkoski: IAST - Institute for Advanced Study in Toulouse, TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Ss. Cyril and Methodius University in Skopje

Working Papers from HAL

Abstract: Economic complexity estimates rely on eigenvectors derived from matrices of specialization to explain differences in economic growth, inequality, and sustainability. Yet, despite their widespread use, we still lack a principled theory that can deduce these eigenvectors from first principles and place them in the context of a mechanistic model. Here, we calculate these eigenvectors analytically for a model where the output of an economy in an activity increases with the probability the economy is endowed with the factors required by the activity. We show that the eigenvector known as the Economic Complexity Index or ECI is a monotonic function of the probability that an economy is endowed with a factor, and that in a multi-factor model, it is an estimate of the average endowment across all factors. We then generalize this result to other production functions and to a short-run equilibrium framework with prices, wages, and consumption. We find that our main result does not depend on the introduction of prices or wages, and that the derived wage function is consistent with the convergence of economies with a similar level of complexity. Finally, we use this model to explain the shape of networks of related activities, such as the product space and the research space. These findings solve long standing theoretical puzzles in the economic complexity literature and validate the idea that metrics of economic complexity are estimates of an economy being endowed with multiple factors.

Date: 2025-06-26
Note: View the original document on HAL open archive server: https://hal.science/hal-05130887v1
References: Add references at CitEc
Citations:

Downloads: (external link)
https://hal.science/hal-05130887v1/document (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-05130887

Access Statistics for this paper

More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD ().