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Smithian Growth through Creative Organization

Author

Listed:
  • Patrick Legros

    (ECARES, Université Libre de Bruxelles; and CEPR)

  • Andrew F. Newman

    (Boston University and CEPR)

  • Eugenio Proto

    (University of Warwick)

Abstract

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.

Suggested Citation

  • Patrick Legros & Andrew F. Newman & Eugenio Proto, 2007. "Smithian Growth through Creative Organization," Boston University - Department of Economics - Working Papers Series WP2007-002, Boston University - Department of Economics.
  • Handle: RePEc:bos:wpaper:wp2007-002
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    References listed on IDEAS

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    2. Garicano, Luis & Rossi-Hansberg, Esteban, 2012. "Organizing growth," Journal of Economic Theory, Elsevier, vol. 147(2), pages 623-656.
    3. Alessandro Spiganti, 2022. "Wealth Inequality and the Exploration of Novel Alternatives," Working Papers 2022:02, Department of Economics, University of Venice "Ca' Foscari".
    4. Hiller, Victor, 2018. "Self-control and the rise and fall of factory discipline," Journal of Development Economics, Elsevier, vol. 133(C), pages 187-200.
    5. Orman, Cuneyt, 2015. "Organization of innovation and capital markets," The North American Journal of Economics and Finance, Elsevier, vol. 33(C), pages 94-114.
    6. 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.
    7. Stephen L. Parente & Klaus Desmet, 2008. "The Evolution of Markets and the Revolution of Industry," 2008 Meeting Papers 688, Society for Economic Dynamics.
    8. Shingo Ishiguro, 2007. "Organizational Dynamics," Discussion Papers in Economics and Business 07-14, Osaka University, Graduate School of Economics.
    9. Aghion, Philippe & Dewatripont, Mathias & Legros, Patrick & Zingales, Luigi (ed.), 2016. "The Impact of Incomplete Contracts on Economics," OUP Catalogue, Oxford University Press, number 9780199826216.
    10. Chen, Cheng, 2019. "Trade liberalization, agency problem and aggregate productivity," European Economic Review, Elsevier, vol. 111(C), pages 421-442.

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    JEL classification:

    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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