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Smithian Growth through Creative Organization

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  • Legros, Patrick
  • Newman, Andrew
  • Proto, Eugenio

Abstract

We consider an endogenous growth model in which appropriate organization fosters innovation, but because of contractibility problems, this benefit cannot be internalized. The organizational design element we focus on is the division of labour, which as Adam Smith argued, facilitates invention by observers of the production process. However, entrepreneurs choose its level only to facilitate monitoring their workers. Whether there is innovation and growth depends on the interaction of the markets for labour and for inventions. Because of a credit market imperfection, the relative scarcity of entrepreneurs and workers depends on the wealth distribution. A high level of specialization is chosen when the wage share is low, i.e. when there are few wealthy. But in this case there are also few entrepreneurs and a consequent small market for innovations, which discourages inventive activity. When there are many wealthy, the innovation market is large, but the rate of invention is low because there is little specialization. Sustained technological progress and economic growth therefore require only moderate levels of inequality. The model also suggests that the growth rate need not be monotonic in the "quality of institutions," such as the degree of credit market imperfection.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5709.

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Date of creation: Jun 2006
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Handle: RePEc:cpr:ceprdp:5709

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Keywords: division of labour; organization theory; technical change;

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Cited by:
  1. Stephen L. Parente & Klaus Desmet, 2008. "The Evolution of Markets and the Revolution of Industry," 2008 Meeting Papers 688, Society for Economic Dynamics.
  2. Shingo Ishiguro, 2007. "Organizational Dynamics," Discussion Papers in Economics and Business 07-14, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  3. Andrew F. Newman & Patrick Legros, 2011. "Incomplete Contracts and Industrial Organization: A Survey," Boston University - Department of Economics - Working Papers Series WP2011-036, Boston University - Department of Economics.
  4. Inci, Eren, 2013. "Occupational choice and the quality of entrepreneurs," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 1-21.
  5. Luis Garicano & Esteban Rossi-Hansberg, 2007. "Organizing Growth," NBER Working Papers 13705, National Bureau of Economic Research, Inc.

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