Big Push, Distortions, and Economic Development

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Abstract Why are some countries poor and others rich? One view emphasizes the role of resource misallocation in poor countries. An alternative view emphasizes the role of coordination failures: Individual firms do not find it profitable to adopt advanced technologies unilaterally, even though everyone will benefit from coordinated adoptions. The latter view has a long tradition in policy circles, known as the Big Push. The proposed research bridges these two views in a quantitative framework using granular data. The project explores the notion that the complementary in firms' technology adoption decisions can powerfully amplify the effect of other sources of economic inefficiency. This amplification operates even when there is no coordination failure, and coordination failures can be thought of as an extreme form of amplification. This mechanism not only helps explain the vast differences in income per capital across countries, but also illustrates the conditions under which reforms or industrial policies can have positive impact on the economy and are more likely to succeed.This project focuses on the model elements that cause the complementary in firms' technology adoption decisions, which is necessary for the equilibrium multiplicity central to the coordination failure view. This research considers complementary rather than multiplicity for implications to be more widely and robustly applicable as equilibrium multiplicity hinges on several restrictive assumptions. The project develops a model of entry and technology adoption by ex-ante heterogeneous firms, which produce differentiated goods, are subject to idiosyncratic distortions, and are connected to one another through input-output linkages. Firms first choose whether to pay a fixed cost and enter the market. Active firms can operate a traditional technology or, upon paying adoption costs, a more productive modern technology. The input-output linkages are the source of the complementary in technology adoption. The project identifies the conditions under which the complementary in firms' technology adoption decisions supports multiple equilibria, which are stronger than the conditions for amplification. Utilizing microeconomic data, the project examines how complementary substantially amplifies the effect of distortions on aggregate productivity, sometimes through equilibrium multiplicity but also when the equilibrium is unique. The project then extends the framework to multi-sector models and dynamic models. The research further explores how complementary in technology adoption may amplify economic shocks over the business cycles.This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.