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The Dynamics of Development: Innovation and Reallocation

Author

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  • 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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    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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