Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 850: The World Distribution of Productivity: Country TFP Choice in a Nelson-Phelps Economy

Erika Färnstrand Damsgaard () and Per Krusell ()
Additional contact information
Erika Färnstrand Damsgaard: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Per Krusell: IIES, Postal: Stockholm University, SE-106 91 Stockholm, Sweden

Abstract: This paper builds a theory of the shape of the distribution of total-factor productivity (TFP) across countries. The data on productivity suggests vast differences across countries, and arguably even has “twin peaks”. The theory proposed here is consistent with vast differences in long-run productivity, and potentially also with a twin-peaks outcome, even under the assumption that all countries are ex-ante identical. It is based on the hypothesis that TFP improvements in a given country follow a Nelson-Phelps specification. Thus, they derive from past investments in the country itself and, through a spillover (or catch-up) term, from past investments in other countries. We then construct a stochastic dynamic general equilibrium model of the world which has externalities: each country invests in TFP and internalizes the dynamic effects of its own investment, while treating other countries' investments as given. Average world growth is endogenous, as is the distribution of TFP across countries. We find that small idiosyncratic TFP shocks can lead to large long-run differences in TFP levels and that, in the long run, the world distribution of TFP across countries may be asymmetric, i.e., twin-peaked, or bimodal. More specifically, twin-peaked world distributions of TFP arise if the catch-up term in the Nelson-Phelps equation has a sufficiently low weight. If, on the other hand, technological catch-up is important, the world distribution of TFP is unimodal, though it may still have large dispersion.

Keywords: Growth; Inequality

JEL-codes: F43; O10

38 pages, September 23, 2010

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