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Distributional Effects of Capital and Labor on Economic Growth

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  • Michal Paluch
  • Marc Schiffbauer

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    Abstract

    In the following we propose a growth model for an economy consisting of firms which are heterogeneous in technologies and input demands. We show that the growth rate in this economy depends not only on changes in the aggregate level of capital and labor, but also on changes in the allocation of these inputs across firms. As the latter effects are neglected in conventional growth models, they are misleadingly captured by the residual TFP measure. In contrast, we are able to quantify the infuence of these components. Our empirical analysis, which is based on structural estimation from firm-level data, reveals that changes in allocation of capital and labor have pronounced effects on GDP-growth for most European countries. Further, we take cross-country differences in the distributional effects into account to improve conventional growth accounting exercises. In particular, we find that they explain additionally up to 17% of growth differences among 19 European countries. Consequently, allowing for heterogeneity in firm-level technologies and input demands increases the explanatory power of the inputs.

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    File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse20_2007.pdf
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    Bibliographic Info

    Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse20_2007.

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    Length: 32
    Date of creation: Dec 2007
    Date of revision:
    Handle: RePEc:bon:bonedp:bgse20_2007

    Contact details of provider:
    Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
    Fax: +49 228 73 6884
    Web page: http://www.bgse.uni-bonn.de

    Related research

    Keywords: aggregation of production functions; distribution of capital and labor; firm heterogeneity; growth accounting;

    References

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    1. Acemoglu, D. & Zilibotti, F., 1998. "Productivity Differences," Papers 660, Stockholm - International Economic Studies.
    2. Susanto Basu & David N. Weil, 1998. "Appropriate Technology And Growth," The Quarterly Journal of Economics, MIT Press, vol. 113(4), pages 1025-1054, November.
    3. Moses Abramovitz, 1956. "Resource and Output Trends in the United States Since 1870," NBER Books, National Bureau of Economic Research, Inc, number abra56-1, July.
    4. Moses Abramovitz, 1956. "Resource and Output Trends in the United States Since 1870," NBER Chapters, in: Resource and Output Trends in the United States Since 1870, pages 1-23 National Bureau of Economic Research, Inc.
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