Was Prometheus unbound by chance? Risk, diversification and growth
AbstractThis paper offers a theory of development which links the degree of market incompleteness to capital accumulation and growth. At early stages of development, the presence of indivisible projects limits the degree of risk-spreading (diversification) that the economy can achieve. The desire to avoid highly risky investments slows down capital accumulation and the inability to diversify idiosyncratic risks introduces high uncertainty in the growth process. The typical development pattern will consist of a lengthy period of âprimitive accumulationâ with highly variable output, followed by take-off and financial deepening and lastly, steady growth. âLuckyâ countries will spend relatively less time in the primitive accumulation stage and develop faster. Although all agents are price-takers and there are no technological spillovers, the decentralized equilibrium is inefficient because individuals do not take into account their impact on the diversification opportunities of others. We also show that our results generalize to economies with international capital flows.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 98.
Date of creation: Nov 1994
Date of revision:
Contact details of provider:
Web page: http://www.econ.upf.edu/
Other versions of this item:
- Acemoglu, Daron & Zilibotti, Fabrizio, 1997. "Was Prometheus Unbound by Chance? Risk, Diversification, and Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(4), pages 709-51, August.
- Acemoglu, Daron & Zilibotti, Fabrizio, 1996. "Was Prometheus Unbound by Chance? Risk, Diversification and Growth," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1426, C.E.P.R. Discussion Papers.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G20 - Financial Economics - - Financial Institutions and Services - - - General
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.