Technological Diversification
Miklós Koren and Silvana Tenreyro
Abstract
Economies at early stages of development are often shaken by abrupt changes in growth rates, whereas advanced economies tend to feature relatively stable growth rates (Lucas, 1988). To explain this pattern, we propose a theory of technological diversifi cation. Production makes use of different input varieties, which are subject to imperfectly correlated shocks. Technological progress takes the form of an increase in the number of varieties, raising average productivity. In addition, the expansion in the number of varieties in our model provides diversifi cation bene ts against variety-speci c shocks, potentially lowering the volatility of output growth. Technological complexity evolves endogenously in response to pro t incentives. The decline in volatility thus arises as a by-product of rmsincentives to increase pro ts and is hence an almost inexorable outcome of the development process. We quantitatively asses the predictions of the model in light of the empirical evidence and nd that for reasonable parameter values, the model can generate a decline in volatility with development consistent with empirical patterns. Our model highlights a hitherto overlooked implication of the class of expanding-variety growth models introduced by Romer (1990) and Grossman- Helpman (1991), which makes them suitable to explain the decline in volatility that accompanies the development process.
October 2009
Publication status:
Revise and resubmit at the American Economic Review.