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The Economics of Growth - Free

504 Pages · 2011 · 2.25 MB · English

  • The Economics of Growth - Free

    THE ECONOMICS OF GROWTH


    Philippe Aghion and Peter Howitt


    with the collaboration of Leonardo Bursztyn


    The MIT Press


    Cambridge, Massachusetts


    London, England © 2009 Massachusetts Institute of Technology


    All rights reserved. No part of this book may be reproduced in any form by any electronic or


    mechanical means (including photocopying, recording, or information storage and retrieval) without


    permission in writing from the publisher.


    For information about special quantity discounts, please email special_sales@mitpress.mit.edu


    This book was set in Times Roman by SNP Best-set Typesetter Ltd., Hong Kong.


    Printed and bound in the United States of America.


    Library of Congress Cataloging-in-Publication Data


    Aghion, Philippe.


    The economics of growth / Philippe Aghion and Peter W. Howitt.


    p. cm.


    Includes bibliographical references and index.


    ISBN 978-0-262-01263-8 (hardcover : alk. paper)


    1. Economic development. I. Howitt, Peter. II. Title.


    HD82.A5452 2009


    338.9—dc22


    2008029818


    10 9 8 7 6 5 4 3 2 1 Contents


    Preface xvii


    Why This Book? xvii


    For Whom? xviii


    Outline of the Book xix


    Acknowledgments xxi


    Introduction 1


    I.1 Why Study Economic Growth? 1


    I.2 Some Facts and Puzzles 1


    I.2.1 Growth and Poverty Reduction 1


    I.2.2 Convergence 2


    I.2.3 Growth and Inequality 4


    I.2.4 The Transition from Stagnation to Growth 5


    I.2.5 Finance and Growth 5


    I.3 Growth Policies 6


    I.3.1 Competition and Entry 7


    I.3.2 Education and Distance to Frontier 8


    I.3.3 Macroeconomic Policy and Growth 10


    I.3.4 Trade and Growth 10


    I.3.5 Democracy and Growth 11


    I.4 Four Growth Paradigms 12


    I.4.1 The Neoclassical Growth Model 12


    I.4.2 The AK Model 13


    I.4.3 The Product-Variety Model 14


    I.4.4 The Schumpeterian Model 15


    PART I: BASIC PARADIGMS OF GROWTH THEORY 19


    1 Neoclassical Growth Theory 21


    1.1 Introduction 21


    1.2 The Solow-Swan Model 21


    1.2.1 Population Growth 24


    1.2.2 Exogenous Technological Change 27


    1.2.3 Conditional Convergence 29


    1.3 Extension: The Cass-Koopmans-Ramsey Model 31


    1.3.1 No Technological Progress 31 viii Contents


    1.3.2 Exogenous Technological Change 37


    1.4 Conclusion 39


    1.5 Literature Notes 39


    Appendix 1A: Steady State and Convergence in the


    Cass-Koopmans-Ramsey Model 40


    Appendix 1B: Dynamic Optimization Using the Hamiltonian 43


    Problems 45


    2 The AK Model 47


    2.1 Introduction 47


    2.1.1 The Harrod-Domar Model 48


    2.2 A Neoclassical Version of Harrod-Domar 49


    2.2.1 Basic Setup 49


    2.2.2 Three Cases 51


    2.3 An AK Model with Intertemporal Utility Maximization 52


    2.3.1 The Setup 53


    2.3.2 Long-Run Growth 54


    2.3.3 Welfare 55


    2.3.4 Concluding Remarks 55


    2.4 The Debate between Neoclassical and AK Advocates, in a


    Nutshell 56


    2.5 An Open-Economy AK Model with Convergence 60


    2.5.1 A Two-Sector Closed Economy 61


    2.5.2 Opening up the Economy with Fixed Terms of Trade 62


    2.5.3 Closing the Model with a Two-Country Analysis 64


    2.5.4 Concluding Comment 66


    2.6 Conclusion 66


    2.7 Literature Notes 67


    Problems 67


    3 Product Variety 69


    3.1 Introduction 69


    3.2 Endogenizing Technological Change 69


    3.2.1 A Simple Variant of the Product-Variety Model 70


    3.2.2 The Romer Model with Labor as R&D Input 74


    3.3 From Theory to Evidence 77


    3.3.1 Estimating the Effect of Variety on Productivity 77 Contents ix


    3.3.2 The Importance of Exit in the Growth Process 79


    3.4 Conclusion 80


    3.5 Literature Notes 81


    Problems 82


    4 The Schumpeterian Model 85


    4.1 Introduction 85


    4.2 A One-Sector Model 85


    4.2.1 The Basics 85


    4.2.2 Production and Profi ts 86


    4.2.3 Innovation 87


    4.2.4 Research Arbitrage 88


    4.2.5 Growth 89


    4.2.6 A Variant with Nondrastic Innovations 90


    4.2.7 Comparative Statics 91


    4.3 A Multisector Model 92


    4.3.1 Production and Profi t 92


    4.3.2 Innovation and Research Arbitrage 94


    4.3.3 Growth 95


    4.4 Scale Effects 96


    4.5 Conclusion 99


    4.6 Literature Notes 100


    Problems 101


    5 Capital, Innovation, and Growth Accounting 105


    5.1 Introduction 105


    5.2 Measuring the Growth of Total Factor Productivity 106


    5.2.1 Empirical Results 107


    5.3 Some Problems with Growth Accounting 109


    5.3.1 Problems in Measuring Capital, and the Tyranny of Numbers 109


    5.3.2 Accounting versus Causation 112


    5.4 Capital Accumulation and Innovation 113


    5.4.1 The Basics 114


    5.4.2 Innovation and Growth 116


    5.4.3 Steady-State Capital and Growth 116


    5.4.4 Implications for Growth Accounting 118 x Contents


    5.5 Conclusion 119


    5.6 Literature Notes 119


    Appendix: Transitional Dynamics 120


    Problems 121


    PART II: UNDERSTANDING THE GROWTH PROCESS 127


    6 Finance and Growth 129


    6.1 Introduction 129


    6.2 Innovation and Growth with Financial Constraints 130


    6.2.1 Basic Setup 130


    6.2.2 Innovation Technology and Growth without Credit Constraint 132


    6.2.3 Credit Constraints: A Model with Ex Ante Screening 132


    6.2.4 A Model with Ex Post Monitoring and Moral Hazard 134


    6.3 Credit Constraints, Wealth Inequality, and Growth 136


    6.3.1 Diminishing Marginal Product of Capital 136


    6.3.2 Productivity Differences 139


    6.4 The Empirical Findings: Levine’s Survey, in a Nutshell 142


    6.4.1 Cross-Country 143


    6.4.2 Cross-Industry 145


    6.5 Conclusion 147


    6.6 Literature Notes 147


    Problems 148


    7 Technology Transfer and Cross-Country Convergence 151


    7.1 Introduction 151


    7.2 A Model of Club Convergence 152


    7.2.1 Basics 152


    7.2.2 Innovation 153


    7.2.3 Productivity and Distance to Frontier 154


    7.2.4 Convergence and Divergence 156


    7.3 Credit Constraints as a Source of Divergence 158


    7.3.1 Theory 159


    7.3.2 Evidence 161


    7.4 Conclusion 163


    7.5 Literature Notes 165


    Problems 166 Contents xi


    8 Market Size and Directed Technical Change 169


    8.1 Introduction 169


    8.2 Market Size in Drugs 169


    8.2.1 Theory 169


    8.2.2 Evidence 171


    8.3 Wage Inequality 173


    8.3.1 The Debate 174


    8.3.2 The Market-Size Explanation 176


    8.4 Appropriate Technology and Productivity Differences 182


    8.4.1 Basic Setup 182


    8.4.2 Equilibrium Output and Profi ts 183


    8.4.3 Skill-Biased Technical Change 184


    8.4.4 Explaining Cross-Country Productivity Differences 185


    8.5 Conclusion 186


    8.6 Literature Notes 187


    Problems 188


    9 General-Purpose Technologies 193


    9.1 Introduction 193


    9.2 Explaining Productivity Slowdowns 196


    9.2.1 General-Purpose Technologies in the Neoclassical Model 196


    9.2.2 Schumpeterian Waves 198


    9.3 GPT and Wage Inequality 204


    9.3.1 Explaining the Increase in the Skill Premium 204


    9.3.2 Explaining the Increase in Within-Group Inequality 206


    9.4 Conclusion 210


    9.5 Literature Notes 211


    Problems 212


    10 Stages of Growth 217


    10.1 Introduction 217


    10.2 From Stagnation to Growth 217


    10.2.1 Malthusian Stagnation 217


    10.2.2 The Transition to Growth 222


    10.2.3 Commentary 224


    10.3 From Capital Accumulation to Innovation 226


    10.3.1 Human-Capital Accumulation 226 xii Contents


    10.3.2 Physical-Capital Accumulation 227


    10.4 From Manufacturing to Services 230


    10.5 Conclusion 232


    10.6 Literature Notes 232


    Problems 233


    11 Institutions and Nonconvergence Traps 237


    11.1 Introduction 237


    11.2 Do Institutions Matter? 238


    11.2.1 Legal Origins 239


    11.2.2 Colonial Origins 240


    11.3 Appropriate Institutions and Nonconvergence Traps 243


    11.3.1 Some Motivating Facts 243


    11.3.2 A Simple Model of Distance to Frontier and Appropriate


    Institutions 246


    11.4 Conclusion 258


    11.5 Literature Notes 261


    Problems 263


    PART III: GROWTH POLICY 265


    12 Fostering Competition and Entry 267


    12.1 Introduction 267


    12.2 From Leapfrogging to Step-by-Step Technological Progress 267


    12.2.1 Basic Environment 268


    12.2.2 Technology and Innovation 269


    12.2.3 Equilibrium Profi ts and Competition in Level and


    Unlevel Sectors 269


    12.2.4 The Schumpeterian and “Escape-Competition” Effects 271


    12.2.5 Composition Effect and the Inverted U 272


    12.2.6 Empirical Evidence 274


    12.3 Entry 274


    12.3.1 The Environment 276


    12.3.2 Technology and Entry 276


    12.3.3 Equilibrium Innovation Investments 277


    12.3.4 The Effect of Labor Market Regulations 278


    12.3.5 Main Theoretical Predictions 279 Contents xiii


    12.3.6 Evidence on the Growth Effects of Entry 279


    12.3.7 Evidence on the Effects of (De)Regulating Entry 280


    12.4 Conclusion 281


    12.5 Literature Notes 282


    Problems 283


    13 Investing in Education 287


    13.1 Introduction 287


    13.2 The Capital Accumulation Approach 288


    13.2.1 Back to Mankiw, Romer, and Weil 288


    13.2.2 Lucas 292


    13.2.3 Threshold Effects and Low-Development Traps 295


    13.3 Nelson and Phelps and the Schumpeterian Approach 297


    13.3.1 The Nelson and Phelps Approach 297


    13.3.2 Low-Development Traps Caused by the Complementarity


    between R&D and Education Investments 300


    13.4 Schumpeter Meets Gerschenkron 302


    13.4.1 A Model of Distance to Frontier and the Composition of


    Education Spending 302


    13.4.2 Cross-Country and Cross-U.S.-State Evidence 307


    13.5 Conclusion 311


    13.6 Literature Notes 312


    Problems 314


    14 Reducing Volatility and Risk 319


    14.1 Introduction 319


    14.2 The AK Approach 321


    14.2.1 The Jones, Manuelli, and Stacchetti Model 321


    14.2.2 Counterfactuals 324


    14.3 Short-versus Long-Term Investments 326


    14.3.1 The Argument 326


    14.3.2 Motivating Evidence 327


    14.3.3 The AABM Model 329


    14.3.4 Confronting the Credit Constraints Story with Evidence 339


    14.3.5 An Alternative Explanation for the Procyclicality of R&D 340


    14.4 Risk Diversifi cation, Financial Development, and Growth 341


    14.4.1 Basic Framework 341


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