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Smithian Growth Through Creative Organization

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  • Legros, Patrick

    (ECARES and CEPR)

  • Newman, Andrew F

    (Boston University and CEPR)

  • Proto, Eugenio

    (University of warwick)

Abstract

We consider a 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 labor, 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 depends on the interaction of the markets for labor and for inventions. A high level of specialization is chosen when the wage share is low. But low wage shares arise only when there are few entrepreneurs, which limits the market for innovations therefore and discourages inventive activity. When there are many entrepreneurs, the innovation market is large, but the rate of invention is low because there is little specialization. Rapid technological progress therefore requires a balance between these opposing e ects, which occurs with a moderate relative scarcity of entrepreneurs and workers. In a dynamic version of the model in which a credit constraint limits entry into entrepreneurship, this relative scarcity depends on the wealth distribution, which evolves endogenously. There is an inverted-U relation between growth rates driven by innovation and the level of inequality. Institutional improvements have ambiguous effects on growth. In light of the model, we offer a reassessment of the mechanism by which organizational innovations such as the factory may have spawned the industrial revolution. Key words: factory system ; industrial revolution ; technological change ; contracts

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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 981.

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Date of creation: 2012
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Handle: RePEc:wrk:warwec:981

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Cited by:
  1. 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.
  2. Esteban Rossi-Hansberg & Luis Garicano, 2008. "Organizing Growth," 2008 Meeting Papers 247, Society for Economic Dynamics.
  3. Inci, Eren, 2013. "Occupational choice and the quality of entrepreneurs," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 1-21.
  4. Stephen L. Parente & Klaus Desmet, 2008. "The Evolution of Markets and the Revolution of Industry," 2008 Meeting Papers 688, Society for Economic Dynamics.
  5. 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).

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