Entrepreneurs, Professionals, and Growth

We examine the implications for growth and development of the existence of two types of human capital: entrepreneurial and professional. Entrepreneurs accumulate human capital through a work-experience intensive process, whereas professionals human capital accumulation is education-intensive. Moreover, the return to entrepreneurship is uncertain. We show how skill-biased technological progress leads to changes in the composition of aggregate human capital; as technology improves, individuals devote less time to the accumulation of human capital through work experience and more to the accumulation of human capital through professional training. Thus, our model explains why entrepreneurs play a relatively more important role in intermediate-income countries and professionals are relatively more abundant in richer economies. It also shows that those countries that initially have too little of either entrepreneurial or professional human capital may end up in a development trap.     

Voracity, growth, and welfare

This paper explores some implications of the comparison between feedback Nash and Stackelberg equilibria for growth and welfare in a ‘voracity’ model. We show that, as compared to the Nash equilibrium, the Stackelberg equilibrium involves a lower growth rate, while it leaves both the leaders and the followers better off, i.e., the Stackelberg equilibrium is Pareto superior to the Nash equilibrium.     

Twin Engines of Growth: Skills and Technology as Equal Partners in Balanced Growth

We develop an endogenous growth model in which skill acquisition by households and innovation by firms make distinct contributions to productivity growth. Nevertheless, the incentives faced by firms and households are inextricably linked because skills are required to implement new technologies. Skills and technologies are dynamic complements but, because their production complementarity is inherently bounded, they are equal partners in driving growth: neither can generate sustained growth alone. Our model has important implications for the effectiveness of alternative growth-promoting policies, for interpretating the empirical relationship between growth and schooling, and the relationship between growth and intergenerational wage dispersion.     

Pollution,abatement and balanced growth

The analysis of endogenous growth models with pollution often concentrates on steady state trajectories, under the assumption that the steady state is in some sense stable. In the present note we provide examples showing that this issue should be dealt with carefully. We use the Rebelo Ak model augmented with a stock of pollutants causing a negative externality. It is found that optimal growth is not necessarily balanced (contrary to the outcome of the standard Rebelo model). Moreover, the existence of the externality may affect long run optimal growth rates.The author is grateful to an anonymous referee for comments. All remaining errors are the author's sole responsibility.     

The outsourcing productivity paradox: total outsourcing, organisational innovation, and long run productivity growth

A growing number of empirical studies find a relationship between the outsourcing of activities and a long term loss of firm productivity growth. The paper addresses this outsourcing productivity paradox by examining the connection between total outsourcing and organisational innovation. We present a model of organisational innovation in which managers raise productive efficiency by identifying organisational architectures that more effectively integrate value-adding activities and administrative routines. As part of this process, managers can internally or externally source an activity. Simulations of the model show that large scale outsourcing restricts the scope for future organisational innovation, leading to lower productivity growth. The findings accord with the empirical data and provide a salutary warning for managers and policy-makers about the long term implications of total outsourcing.

Money,price dispersion and welfare

Summary. We introduce heterogeneous preferences into a tractable model of monetary search to generate price dispersion, and then examine the effects of money growth on price dispersion and welfare. With buyers search intensity fixed, we find that money growth increases the range of (real) prices and lowers welfare as agents shift more of their consumption to less desirable goods. When buyers search intensity is endogenous, multiple equilibria are possible. In the equilibrium with the highest welfare level, money growth reduces welfare and increases the range of prices, while having ambiguous effects on search intensity. However, there can be a welfare-inferior equilibrium in which an increase in money growth increases search intensity, increases welfare, and reduces the range of prices.Received: 25 July 2003, Revised: 12 December 2003JEL Classification Numbers: E31, D60.B. Peterson, S. Shi: We thank Gabriele Camera, Aleksander Berentsen and an anonymous referee for useful suggestions. We have also received valuable comments from the participants of the workshop at Michigan State, the Purdue Conference on Monetary Theory (2003) and the Midwest Macro Meeting (Chicago, 2003). Shi gratefully acknowledges financial support from the Bank of Canada Fellowship and the Social Sciences and Humanities Research Council of Canada. The opinion expressed here is the authors own and does not reflect the view of the Bank of Canada.Correspondence to: S. Shi     

Trust, Reciprocity, and Social History: A Re-examination

Berg et al. (Games and Economic Behavior, 10, pp. 122–142, 1995) study trust and reciprocity in an investment setting. They find significant amounts of trust and reciprocity and conclude that trust is a guiding behavioral instinct (a primitive in their terminology). We modify the way information is presented to participants and, through a questionnaire, prompt strategic reasoning. To our surprise, none of our various treatments led to a reduction in the amount invested. Previously reported experimental results to the contrary did not survive replication. Our results suggest that those by Berg, Dickhaut, and McCabe are rather robust to changes in information presentation and strategic reasoning prompts. We discuss the implications of these findings.     

Precautionary Demand for Education, Inequality, and Technological Progress

This paper offers an explanation for the evolution of wage inequality within and between industries and education groups over the past several decades. The model is based on the disproportionate depreciation of technology-specific skills versus general skills due to technological progress, which occurs randomly across sectors. Consistent with empirical evidence, the model predicts that increasing randomness is the primary source of inequality growth within uneducated workers, whereas inequality growth within educated workers is determined more by changes in the composition and return to ability. Increasing randomness generates a precautionary demand for education, which we show empirically to be significant.     

Innovation,profitability and growth over the business cycle

Recent debates about Industrial Policy are dominated by a concern to make firms more innovative. In order to make progress in assessing the magnitude of the effects of innovation on corporate performance, one needs to know how such effects occur. We have contrasted two views of the effect of innovation—the product view and the process view—and have provided some evidence to suggest that both effects are evident in the data. Although it is clear that individual innovations themselves have a positive effect on profitability and growth, it is equally clear that the process of innovation seems to transform firms in some way that gives rise to what look like generic differences between innovators and non-innovators. As a consequence, the process by which profitability and growth are generated differs noticeably between the two types of firms. Perhaps the clearest of these differences is that innovating firms seem to be much less sensitive to cyclical shocks than non-innovating firms are.We are obliged to the ESRC for support. Some of the work discussed here draws upon joint work with John Van Reenan, and we are obliged to him for his assistance and helpful comments. Jonathan Haskel also provided very helpful comments on an early draft of the paper. We are also obliged to seminar audiences at the University of Ulster, the University of Manchester, the National Institute of Economic and Social Research, NERA, UMIST, University College London, the Centre for Economic Performance at the LSE and the Industrial Organization Conference held at Vienna, June 24–26, 1992, for many stimulating observations. However, the usual disclaimer applies.