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The Dynamics of Development: Entrepreneurship, Innovation, and Reallocation

Author

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  • Roberto Fattal Jaef

    (The World Bank)

  • Francisco Buera

    (Federal Reserve Bank of Chicago)

Abstract

Development dynamics are characterized by sustained improvements in TFP, protracted increases in investment rates, and a broad transformation in the structure of production. Low income countries are characterized by small average firm size, slow firm growth over the life-cycle, and significant dispersion of marginal products. In this paper we present a quantitative theory that jointly matches the behavior of firms in under-developed economies and key properties of development paths. We work with a model that features endogenous innovation decisions by entrepreneurs, reallocation of factors due to idiosyncratic productivity shocks, and selection in and out of entrepreneurship. We construct a low-TFP stationary equilibrium with dispersion in marginal products that is driven by idiosyncratic distortions. We then trigger development through a reform that liberalizes the economy from all frictions. Our quantitative theory can account well for cross-sectional and life-cycle patterns in distorted economies, and can generate development paths with rising TFP and investment dynamics, consistent with the data. Ignoring either endogenous innovation or selection in and out of entrepreneurship would lead to counter-factual transition paths, similar to those of the standard neoclassical growth model.

Suggested Citation

  • Roberto Fattal Jaef & Francisco Buera, 2015. "The Dynamics of Development: Entrepreneurship, Innovation, and Reallocation," 2015 Meeting Papers 274, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:274
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    References listed on IDEAS

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    1. Francisco J. Buera & Yongseok Shin, 2013. "Financial Frictions and the Persistence of History: A Quantitative Exploration," Journal of Political Economy, University of Chicago Press, vol. 121(2), pages 221-272.
    2. Andrew Atkeson & Ariel Tomás Burstein, 2010. "Innovation, Firm Dynamics, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(3), pages 433-484, June.
    3. King, Robert G & Rebelo, Sergio T, 1993. "Transitional Dynamics and Economic Growth in the Neoclassical Model," American Economic Review, American Economic Association, vol. 83(4), pages 908-931, September.
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    6. 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.
    7. Andrew Atkeson & Patrick J. Kehoe, 2007. "Modeling the Transition to a New Economy: Lessons from Two Technological Revolutions," American Economic Review, American Economic Association, vol. 97(1), pages 64-88, March.
    8. Chang-Tai Hsieh & Peter J. Klenow, 2014. "The Life Cycle of Plants in India and Mexico," The Quarterly Journal of Economics, Oxford University Press, vol. 129(3), pages 1035-1084.
    9. 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.
    10. Eric Bartelsman & John Haltiwanger & Stefano Scarpetta, 2013. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," American Economic Review, American Economic Association, vol. 103(1), pages 305-334, February.
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    Cited by:

    1. Francisco J. Buera & Joseph P. Kaboski & Yongseok Shin, 2015. "Entrepreneurship and Financial Frictions: A Macrodevelopment Perspective," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 409-436, August.
    2. Andrew Atkeson & Ariel Burstein, 2019. "Aggregate Implications of Innovation Policy," Journal of Political Economy, University of Chicago Press, vol. 127(6), pages 2625-2683.
    3. Poschke, Markus, 2019. "Wage Employment, Unemployment and Self-Employment across Countries," IZA Discussion Papers 12367, Institute of Labor Economics (IZA).
    4. Faisal Sohail, 2018. "Employer Size and Spinout Dynamics," 2018 Meeting Papers 274, Society for Economic Dynamics.

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