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The Dynamics of Development: Innovation and Reallocation

Author

Listed:
  • Francisco J. Buera
  • Roberto N. Fattal-Jaef

Abstract

This paper proposes a quantitative model of endogenous firm dynamics to study growth-acceleration episodes triggered by reforms. We find that reversals of entry distortions lead to persistent growth in TFP and declining average firm size, as in the experience of successful postcommunist transitions. Removing idiosyncratic distortions results in a more protracted path of TFP and a rising average firm size, as in noncommunist growth accelerations. When calibrating the reforms to China's liberalization, we find that the model accounts for one-third of the observed growth in TFP while matching the dynamics of average firm size and income inequality.

Suggested Citation

  • Francisco J. Buera & Roberto N. Fattal-Jaef, 2025. "The Dynamics of Development: Innovation and Reallocation," American Economic Journal: Macroeconomics, American Economic Association, vol. 17(4), pages 45-81, October.
    • Handle: RePEc:aea:aejmac:v:17:y:2025:i:4:p:45-81
    DOI: 10.1257/mac.20200032
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    Citations

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    Cited by:

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    2. Da-Rocha, José-María & Restuccia, Diego & Tavares, Marina M., 2023. "Policy distortions and aggregate productivity with endogenous establishment-level productivity," European Economic Review, Elsevier, vol. 155(C).
    3. Joel M. David & Venky Venkateswaran, 2019. "The Sources of Capital Misallocation," American Economic Review, American Economic Association, vol. 109(7), pages 2531-2567, July.
    4. Venky Venkateswaran & Joel David, 2017. "Capital Misallocation: Frictions or Distortions?," 2017 Meeting Papers 1636, Society for Economic Dynamics.
    5. Joel M. David & Venky Venkateswaran, 2016. "Frictional Investment and the Sources of Misallocation," Working Papers 16-13, New York University, Leonard N. Stern School of Business, Department of Economics.
    6. Joonkyu Choi, 2018. "Entrepreneurial Risk-Taking, Young Firm Dynamics, and Aggregate Implications," 2018 Meeting Papers 1018, Society for Economic Dynamics.
    7. Sohail, Faisal, 2021. "From employee to entrepreneur: Learning, employer size, and spinout dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).
    8. Lopez-Martin, Bernabe & Perez-Reyna, David, 2021. "Contracts, firm dynamics, and aggregate productivity," Journal of Economic Dynamics and Control, Elsevier, vol. 130(C).
    9. Yanying Wang & Qingyang Wu, 2024. "Robots, firm relocation, and air pollution: unveiling the unintended spatial spillover effects of emerging technology," Humanities and Social Sciences Communications, Palgrave Macmillan, vol. 11(1), pages 1-17, December.
    10. Todd Schoellman & Bart Hobijn, 2017. "Structural Transformation by Cohort," 2017 Meeting Papers 1417, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • P24 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions

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