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Smithian Growth through Creative Organization

  • Patrick Legros

    (ECARES, Université Libre de Bruxelles; and CEPR)

  • Andrew F. Newman

    ()

    (Institiute for Economic Development, Boston University)

  • Eugenio Proto

    (University of Warwick)

We consider an endogenous growth 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 and growth depends on the interaction of the markets for labor and for inventions. Because of a credit market imperfection, the relative scarcity of entrepreneurs and workers depends on the wealth distribution. A high level of specialization is chosen when the wage share is low, i.e. when there are few wealthy. But in this case there are also few entrepreneurs and a consequent small market for innovations, which discourages inventive activity. When there are many wealthy, the innovation market is large, but the rate of invention is low because there is little specialization. Sustained technological progress and economic growth therefore require only moderate levels of inequality. The model also suggests that the growth rate need not be monotonic in the "quality of institutions," such as the degree of credit market imperfection.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - The Institute for Economic Development Working Papers Series with number dp-158.

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Length: 35 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:bos:iedwpr:dp-158
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