DP3467 Distance to Frontier, Selection, and Economic Growth

Author(s): Daron Acemoglu, Philippe Aghion, Fabrizio Zilibotti
Publication Date: July 2002
Keyword(s): appropriate institutions, convergence, economic growth, imitation, innovation, political economy of growth, selection, technical change, traps
JEL(s): L16, O31, O33, O38, O40
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3467

We analyse an economy where managers engage both in the adoption of technologies from the world frontier and in innovation activities. The selection of high-skill managers is more important for innovation activities. As the economy approaches the technology frontier, selection becomes more important. As a result, countries at early stages of development pursue an investment-based strategy, with long-term relationships, high average size and age of firms, large average investments, but little selection. Closer to the world technology frontier, there is a switch to an innovation-based strategy with short-term relationships, younger firms, less investment and better selection of managers. We show that relatively backward economies may switch out of the investment-based strategy too soon, so certain economic institutions and policies, such as limits on product market competition or investment subsidies, which encourage the investment-based strategy may be beneficial. Societies that cannot switch out of the investment-based strategy, however, fail to converge to the world technology frontier. Non-convergence traps are more likely when policies and institutions are endogenized, enabling beneficiaries of existing policies to bribe politicians to maintain these policies.