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Entrepreneurship and Productivity: The Slow Growth of the Planned Economies

Author

Listed:
  • Claustre Bajona

    (Ryerson University)

  • Luis Locay

    (University of Miami)

Abstract

Trends in gross domestic product (GDP) and total factor productivity (TFP) growth in the former socialist economies seem to indicate that these economies were converging to unusually low long-run growth rates in the late 1980s. In this paper we develop an endogenous growth model of entrepreneurship that is able to account for the difference in long-run performance between centrally planned economies and market-oriented ones. Long-run growth rates of output and productivity are determined by the growth of the stock of managerial knowledge, which in turn depends on the share of the population involved in entrepreneurial activities and on the time that they spend on those activities. We analyze the effect of two characteristics of centrally planned economies on their growth performance. First, in centrally planned economies factors of production are distributed by the central planner to the firms' managers through a contest that uses up some of the managers' productive effort. Second, the leadership is "egalitarian", in the sense that it treats individuals with different abilities equally. We show that these two features reduce the fraction of people becoming entrepreneurs/managers, as well as their managerial effort, which in turn reduces long-run output and TFP growth. Furthermore, we find that centrally planned economies have lower income inequality and slightly higher capital-output ratios, which is consistent with these countries' experiences. (Copyright: Elsevier)

Suggested Citation

  • Claustre Bajona & Luis Locay, 2009. "Entrepreneurship and Productivity: The Slow Growth of the Planned Economies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 505-522, July.
  • Handle: RePEc:red:issued:08-46
    DOI: 10.1016/j.red.2008.11.003
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    References listed on IDEAS

    as
    1. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, Oxford University Press, vol. 124(4), pages 1403-1448.
    2. Diego Restuccia & Richard Rogerson, 2008. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October.
    3. Andrew Atkeson & Patrick J. Kehoe, 1995. "Industry evolution and transition: measuring investment in organization," Staff Report 201, Federal Reserve Bank of Minneapolis.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Kuehn, Zoe, 2012. "Migration, Wages, and Parental Background: Obstacles to Entrepreneurship and Growth in East Germany," MPRA Paper 49250, University Library of Munich, Germany.
    2. Tomáš Volek & Martina Novotná, 2015. "Gross Value Added and Total Factor Productivity In Czech Sectors," Contemporary Economics, University of Finance and Management in Warsaw, vol. 9(1), April.
    3. Etienne Farvaque & Alexander Mihailov & Alireza Naghavi, 2011. "The Grand Experiment of Communism: Discovering the Trade-off between Equality and Efficiency," Working Papers 2011.70, Fondazione Eni Enrico Mattei.
    4. Javad Sadeghzadeh, 2014. "Innovation Subsidies: Misallocation and Technology Upgrade," 2014 Papers psa1207, Job Market Papers.
    5. Zuzana Brixiova & Balázs Égert, 2010. "Modeling Institutions, Start-ups and Productivity during Transition," OECD Economics Department Working Papers 773, OECD Publishing.
    6. Kuehn, Zoe, 2014. "The rise or the fall of the wall? Determinants of low entrepreneurship in East Germany," Working Papers in Economic Theory 2014/03, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
    7. repec:rdg:wpaper:em-dp2011-02 is not listed on IDEAS

    More about this item

    Keywords

    Managerial knowledge; Productivity; Growth; Economic systems;

    JEL classification:

    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • P5 - Economic Systems - - Comparative Economic Systems

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