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Technological diversification

Koren, Miklos and Tenreyro, Silvana (2007) Technological diversification. 6523. Centre for Economic Policy Research, London, UK.

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Abstract

Economies at early stages of development are often shaken by abrupt changes in growth rates, whereas in advanced economies growth rates tend to be relatively stable. To explain this pattern, we propose a theory of technological diversification. 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 diversification benefits against variety-specific shocks and it can hence lower the volatility of output growth. Technological complexity evolves endogenously in response to profit incentives. The decline in volatility thus arises as a by-product of firms' incentives to increase profits and is hence a likely outcome of the development process. We quantitatively asses the predictions of the model in light of the empirical evidence and find that for reasonable parameter values, the model can generate a decline in volatility with the level of development comparable to that in the data.

Item Type: Monograph (Working Paper)
Official URL: http://www.cepr.org
Additional Information: © 2007 Miklós Koren and Silvana Tenreyro
Library of Congress subject classification: T Technology > T Technology (General)
H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O31 - Innovation and Invention: Processes and Incentives
O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O33 - Technological Change: Choices and Consequences; Diffusion Processes
O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O30 - General
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Departments > Economics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 6523
Date Deposited: 03 Jun 2008 17:07
URL: http://eprints.lse.ac.uk/5309/

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