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Technological Diversification

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Author Info
Miklos Koren
Silvana Tenreyro

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Abstract

Economies at early stages of development are often shaken by abrupt changes in growth rates, whereas in advanced economies growth rates tend to be relatively stable. To explain this pattern, we propose a theory of technological diversification. Production makes use of different input varieties, which are subject to imperfectly correlated shocks. Technological progress takes the form of an increase in the number of varieties, raising average productivity. In addition, the expansion in the number of varieties in our model provides diversification benefits against variety-specific shocks and it can hence lower the volatility of output growth. Technological complexity evolves endogenously in response to profit incentives. The decline in volatility thus arises as a by-product of firms' incentives to increase profits and is hence a likely outcome of the development process. We quantitatively asses the predictions of the model in light of the empirical evidence and find th at for reasonable parameter values, the model can generate a decline in volatility with the level of development comparable to that in the data.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0824.

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Date of creation: Oct 2007
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Handle: RePEc:cep:cepdps:dp0824

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Related research
Keywords: volatility endogenous growth diversification technological progress

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Find related papers by JEL classification:
O0 - Economic Development, Technological Change, and Growth - - General
O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
O30 - Economic Development, Technological Change, and Growth - - Technological Change - - - General
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  3. Francesco Caselli & Wilbur John Coleman II, 2001. "Cross-Country Technology Diffusion: The Case of Computers," American Economic Review, American Economic Association, vol. 91(2), pages 328-335, May. [Downloadable!] (restricted)
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  4. Bernanke, Ben & Gertler, Mark, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 87-114, February. [Downloadable!] (restricted)
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  6. Overman, Henry G. & Rice, Patricia & Venables, Anthony J., 2008. "Economic Linkages Across Space," CEPR Discussion Papers 6786, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Aart Kraay & Jaume Ventura, 2007. "Comparative Advantage and the Cross-section of Business Cycles," Journal of the European Economic Association, MIT Press, vol. 5(6), pages 1300-1333, December. [Downloadable!] (restricted)
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  8. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
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  10. Diego Comin & Thomas Philippon, 2005. "The Rise in Firm-Level Volatility: Causes and Consequences," NBER Working Papers 11388, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Comin, D. & Hobijn, B., 2004. "Cross-country technology adoption: making the theories face the facts," Journal of Monetary Economics, Elsevier, vol. 51(1), pages 39-83, January. [Downloadable!] (restricted)
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  13. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December. [Downloadable!] (restricted)
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  14. Jaume Ventura, 1998. "Comparative Advantage and the Cross-Section of Business Cycles," Working papers 98-9, Massachusetts Institute of Technology (MIT), Department of Economics.
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  15. Ross Levine, 1990. "Financial structure and economic development," International Finance Discussion Papers 381, Board of Governors of the Federal Reserve System (U.S.).
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  16. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October. [Downloadable!] (restricted)
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  17. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Steven J. Davis & John Haltiwanger & Ron Jarmin & Javier Miranda, 2006. "Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately Held Firms," NBER Working Papers 12354, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Miklos Koren & Silvana Tenreyro, 2005. "Volatility and Development," CEP Discussion Papers dp0706, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
  3. Catia Batista & Jacques Potin, 2007. "Stages of diversification and specialization in an Heckscher-Ohlin world, 1976-2000," Economics Series Working Papers 356, University of Oxford, Department of Economics. [Downloadable!]
  4. Diego Comin & Thomas Philippon, 2005. "The Rise in Firm-Level Volatility: Causes and Consequences," NBER Working Papers 11388, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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