|
...2002) with endogenous productivity growth and rent-seeking behavior to account for these stylized facts. Our model complements the literature that focuses on the heterogeneity of different agents.
Keywords: volatility of economic growth, technical progress, rent-seeking, stabilization policy, institution.
JEL Classification: E30, O11, O40.
1 Introduction
This paper attempts to develop a simple growth model which relates the volatility of economic growth and technical progress (or total factor productivity growth, or simply TFPG). Recently, there has been a growing interest in the relationship between the volatility of the aggregate output and other macroeconomic variables. (1) For instance, Ramey and Ramey (1995) find that the (average) economic growth rate and the volatility of GDP are negatively correlated. Knack and Keefer (1995), and Acemoglu, Johnson, and Robinson (2001; 2002), among others, find that higher institutional quality has a positive effect on economic growth. Acemoglu et al. (2003) find further that higher institutional quality helps to reduce growth volatility and mitigate economic crises. De Hak (1999), and Blackburn and Galindev (2003) provide growth models which relate macroeconomic volatility and the rate of economic growth. They do not, however, directly relate the technical progress, economic growth and growth volatility. Aghion and Banerjee (2005) argue that it is the interaction between the entrepreneurs and the imperfect capital market which leads to both the business cycle and economic growth. However, most, if not all, of these papers have not related volatility to the productivity of the economy. Tang (2002) is perhaps the first cross-country study which establishes that the higher the rate of technical progress, the lower will be the volatility of economic growth rate. Tang, however, does not provide a theory for this empirical regularity.
This paper attempts to explain the relationship between technical progress, macroeconomic volatility and growth by using a simple endogenous growth model with rent-seeking behavior. The analysis is clearly connected to a growing literature on how the endogenous career choice between productive entrepreneurship and rent-seeking behavior can influence aggregate output. For instance, Baumol (1990) provides many historical examples which show that the returns to rent-seeking can affect the allocation of entrepreneurship. Murphy, Shleifer and Vishny (1991) study how the heterogeneity of agents can interact with the rent-seeking and lead to a lower economic growth rate. (2) Acemoglu and Verdier (1998) present a rich model on the endogenous choice of rent-seeking. However, perhaps due to the finite-horizon nature of their model, they do not explore how rent-seeking activities interact with the determination of economic growth. (3) Tse (2000) carefully calibrates a two-sector general equilibrium model and finds that GDP can increase by more than two times if monopoly is removed from the labor market. In a companion paper, Tse (2002) shows that monopoly in the capital equipment market can also affect employment as well as wages, and hence has important welfare consequences. Tse (2001) shows that the distribution of demand can significantly change the incentives of firms to invest and innovate. It follows that firms indeed have incentives to influence the distribution of demand. Finally, Tse (2004) shows how informational friction can create market power for firms, thus adversely affecting capital accumulation and longrun economic growth. This paper takes a preliminary step to show how rent-seeking activities, which would create some market power for the firms, may not only affect the rate of the economic growth, but also its volatility.
Since both the economic growth rate and its volatility are the subjects of our investigation, they need to be endogenized in the model. Thus, the model necessarily belongs to the family of stochastic, endogenous growth models. (4) The existing literature, however, is more concerned with the time series implications of a typical stochastic endogenous growth model and how these time series implications can be verified, while this paper focuses on how different institutions could affect the (stochastic) time series properties of a growth model, such as the average growth rate and the volatility of GDP.
Economists have long been aware of the problem of rent-seeking and the literature which has accumulated is voluminous. (5) Recent efforts have explored several important issues, such as the strategic interactions among potentially rent-seeking entrepreneurs, the role of constitutions and institutions; and the importance of the initial distribution of wealth, all of which would affect the aggregate economic outcomes. (6) The present paper builds on the work of Angeletos and Kollintzas (2000) but modifies their model in two important ways. (7) First, this paper abstracts from the capital accumulation, which is important for the convergence result in Angeletos and Kollintzas (2000). (8) Since this paper focuses on the mean and variance of the economic growth rate, we suppress this concern. Instead, we endogenizes the economic growth by introducing a simple R & D technology. (9) A merit of this framework is that it can endogenously derive the relationship between rent-seeking and the economic growth rate within a representative household framework. Certainly, the heterogeneity of agents, externality effects, income distribution and redistribution issues are important in understanding the role of rent-seeking in practice. Nevertheless, to complement the existing contribution and to highlight the rent-seeking activities among firms, this simple model abstracts from these factors and focuses merely on the simple, resource allocation consideration which leads to the emergence of rent-seeking. (10)
It should be noticed that the significance of this research may go beyond establishing and explaining another stylized fact in growth, namely, a robust negative relationship between TFPG and growth volatility....
NOTE: All illustrations and photos
have been removed from this article.
More articles from Journal of Economics
Tax effects in a model of product differentiation: a note., October 01, 2006
Looking for additional articles?
Search our database of over 3 million articles.
Looking for more in-depth information on this industry?
Search our complete database of Industry & Market reports by text, subject, publication
name or publication date.
About Goliath
Whether you're looking for sales prospects, competitive information, company
analysis or best practices in managing your organization,
Goliath can help you meet your business needs.
Our extensive business information databases empower business
professionals with both the breadth and depth of credible,
authoritative information they need to support their business
goals. Whether it be strategic planning, sales prospecting,
company research or defining management best practices -
Goliath is your leading source for accurate information.
|
