Endogenous Risk and Growth

Jesse Perla () and Christopher Tonetti

No 479, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: While much of recent growth literature has focused on innovation in the technology frontier, less attention has been paid to the role of the least productive agents in generating growth. We develop an analytically tractable model where growth is created as a positive externality from risk taking by individuals at the bottom of the productivity distribution learning from more productive agents. Heterogeneous firms choose to produce or pay a cost and search for a better opportunity within the economy. Sustained growth comes from the feedback between the endogenously determined distribution of productivity, as evolved by past search decisions, and an optimal forward looking search policy. The growth rate depends on characteristics of the productivity distribution, with a thicker tailed distribution leading to more growth.

Date: 2012
New Economics Papers: this item is included in nep-dge and nep-ino
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