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Externalities, Endogenous Productivity, and Poverty Traps

  • Barseghyan, Levon

    (Cornell University)

  • DiCecio, Riccardo

    ()

    (Federal Reserve Bank of St. Louis)

We present a version of the neoclassical model with an endogenous industry structure. We construct a distribution of firms’ productivity that implies multiple steady-state equilibria even with an arbitrarily small degree of increasing returns to scale. While the most productive firms operate across all the steady states, in a poverty trap less productive firms operate as well. This results in lower average firm productivity and total factor productivity. The distributions of employment by firm size across steady states are consistent with the empirical observation that poor countries have a higher fraction of employment in small firms than rich countries. Differences in output and total factor productivity across steady states are increasing in the degree of returns to scale, the capital share, and the Frisch elasticity of labor supply.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2008-023.

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Length: 31 pages
Date of creation: 2008
Date of revision: 20 Nov 2015
Handle: RePEc:fip:fedlwp:2008-023
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