DP7290 The Evolution of Markets and the Revolution of Industry: A Quantitative Model of England's Development, 1300-2000
|Author(s):||Klaus Desmet, Stephen Parente|
|Publication Date:||May 2009|
|Keyword(s):||Competition, Industrial Revolution, Innovation, Market Revolution, Unified Growth Theory|
|JEL(s):||N33, O14, O33, O41|
|Programme Areas:||International Trade and Regional Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=7290|
This paper argues that an economy's transition from Malthusian stagnation to modern growth requires markets to reach a critical size, and competition to reach a critical level of intensity. By allowing an economy to produce a greater variety of goods, a larger market makes goods more substitutable, raising the price elasticity of demand, and lowering mark-ups. Firms must then become larger to break even, which facilitates amortizing the fixed costs of innovation. We demonstrate our theory in a dynamic general equilibrium model calibrated to England's long-run development and explore how various factors affect the timing of takeoff.