Growth Theory through the Lens of Development Economics

By Abhijit Banerjee, Esther Duflo. 2004

1,069 citations recorded by the source corpus.

Growth theory has traditionally assumed the existence of an aggregate production function, whose existence and properties are closely tied to the assumption of optimal resource allocation within each economy. We show extensive evidence, culled from the micro-development literature, demonstrating that the assumption of optimal resource allocation fails radically. The key fact is the enormous heterogeneity of rates of return to the same factor within a single economy, a heterogeneity that dwarfs the cross-country heterogeneity in the economy-wide average return. Prima facie, we argue, this evidence poses problems for old and new growth theories alike. We then review the literature on various causes of this misallocation. We go on to calibrate a simple model which explicitly introduces the possibility of misallocation into an otherwise standard growth model. We show that, in order to match the data, it is enough to have misallocated factors: there also needs to be important fixed costs in production. We conclude by outlining the contour of a possible non-aggregate growth theory, and review the existing attempts to take such a model to the data.

Subfields: Economics and Econometrics, Sociology and Political Science

View Paper: https://www.semanticscholar.org/paper/6c6c780d8932501b0c00669ce11779c6a9d7c9fd

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

1. Charles I. Jones
2. Benjamin Moll
3. Diego Restuccia
4. Abhijit Banerjee
5. Michael Peters
6. Francisco J. Buera
7. David J. McKenzie
8. Hugo A. Hopenhayn

In Sociology and Political Science

1. Charles I. Jones
2. Todd Schoellman
3. Esther Duflo
4. Abhijit Banerjee
5. Christopher Woodruff
6. David J. McKenzie
7. Jacopo Ponticelli
8. Benjamin F. Jones

Citations in the corpus

• The Marginal Product of Capital (2005, neutral): “1 It is not surprising then that considerable e ff ort and ingenuity have been devoted to the attempt to generate cross-country estimates of the MPK. Banerjee and Du fl o (2004) present an exhaustive review of existing methods and results.”
• Beyond fatalism: An empirical exploration of self-efficacy and aspirations failure in Ethiopia (2011, background): “The same evidence also shows that such behavior is often even more acute among poorer populations (see Banerjee and Duflo (2003); Banerjee and Duflo (2007) for reviews).”
• Intermediate Goods and Weak Links in the Theory of Economic Development (2011, background): “This result has been emphasized by Chari, Kehoe, and McGrattan (2007); Restuccia and Rogerson (2008); and Hsieh and Klenow (2009) and also plays a key role in Banerjee and Duflo (2005), Caselli and Nicola Gennaioli (2005), and Ricardo Lagos (2006).”
• Human Capital and Development Accounting: New Evidence from Wage Gains at Migration (2018, methodology): “We assume that workers with different education levels within the unskilled or skilled group are perfect substitutes, allowing us to aggregate them using data on typical school duration and an assumed 10 percent rate of return per year of schooling (Banerjee and Duflo, 2005). See Appendix C for deta”
• Growing Like China (2011, neutral): “…resource misallocation ( see Stephen L. Parente, Richard Rogerson, and Randall Wright 2000; Francesco Caselli and Wilbur J. Coleman II 2001; Abhijit Banerjee and Esther Duflo 2005; Diego Restuccia and Rogerson 2008; Gino Gancia and Fabrizio Zilibotti 2009; and Chang-Tai Hsieh and Peter J.…”
• The Skill Bias of World Trade (2002, positive): “Data on Mincerian returns to education are drawn from Banerjee and Duflo (2005) and Psacharopoulos and Patrinos (2004).”
• Barriers to entry and returns to capital in informal activities : evidence from Sub-Saharan Africa (2011, positive): “Existing studies on capital returns consistently find very high—not low—returns, often in the order of more than 60 percent annually (e.g. Banerjee and Duflo, 2004; de Mel et al., 2008). de Mel et al. (2008), for instance, use data from a randomized experiment to estimate returns to capital of Sri…”
• Trade, markup heterogeneity and misallocations (2011, neutral): “From (3), a greater variety Ni is associated with higher utility whenever i > 0.”