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Trade and Idea Flows

Listed author(s):
  • Robert E. Lucas

    (University of Chicago)

  • Francisco J. Buera


  • Fernando Alvarez

    (University of Chicago)

This paper extends the work in Alvarez, Buera, and Lucas (2007) to a collection of open economies linked by trade flows. We model the technology of an economy as described by a probability distribution of available costs --– in the sense of labor or other resource requirements --– for producing different goods. Following Kortum (1997), we call such a distribution a technology frontier. An individual potential producer is characterized by his current cost level --– a random variable drawn from the frontier distribution –-- and is also subject to a stochastic flow of new ideas –-- new cost levels. When he receives a cost idea that is better than the one he is able to produce with he adopts it and this new cost becomes his state. If he receives a higher cost idea, or no idea at all, his cost state remains unchanged. The flow of new ideas-new cost levels are random draws from the distribution of sellers to the market where a potential producer is located. As in Eaton and Kortum (2002), the distribution of sellers to a particular market is a function of the world technology frontier, the matrices of trade costs and trade barriers, and the world-wide vector of factor prices. We show that the evolution of the world technological frontier can be described by a system of delay differential equations, and present an algorithm that can be used to solve for the world technological frontier. We present numerical examples where trade barriers lead to a worse distribution of ideas, in that the technology frontier in a world with high trade barriers is stochastically dominated but the technology frontier in a world with low trade barriers.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 984.

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Date of creation: 2011
Handle: RePEc:red:sed011:984
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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