Endogenous Risk and Growth
Social Science Research Network
While much of recent growth literature has focused on innovation in the technology frontier, less attention has been paid to the role of the least productive agents in generating growth. We develop an analytically tractable model where growth is created as a positive externality from risk taking by individuals at the bottom of the productivity distribution learning from more productive agents. Heterogeneous firms choose to produce or pay a cost and search for a better opportunity within the
... omy. Sustained growth comes from the feedback between the endogenously determined distribution of productivity, as evolved by past search decisions, and an optimal forward looking search policy. The growth rate depends on characteristics of the productivity distribution, with a thicker tailed distribution leading to more growth. JEL: D92, E23, 014, O31, O33, O40 1 In Gabaix (2009), firm size is shown to empirically fit a Pareto distribution except for a large mass of small firms. A theoretical relationship between the firm size and productivity distributions is also established. See Aw, Chen, and Roberts (2001) for empirical estimation of productivity distributions, across various industries and over time. 2 This meet and copy process is similar to Jovanovic and Rob (1989), but does not include the potential for additional spillovers beyond the maximum productivity in the pairwise meeting technology. 3 Our endogenous evolution of the distribution is most similar to Lucas and Moll (2011) where heterogeneous agents invest in studying to adopt new ideas, and growth is generated as idea adoption evolves the productivity distribution. In contrast to our paper, Lucas and Moll (2011) emphasizes the intensive margin of time dedicated to learning and develops continuous time computational solution techniques.