Was Prometheus Unbound by Chance? Risk, Diversification, and Growth

Journal Of Political Economy Vol. 105, No. 4 August 1997

Posted: 20 Dec 1996

See all articles by Daron Acemoglu

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Fabrizio Zilibotti

Yale University; Centre for Economic Policy Research (CEPR)

Abstract

This paper offers a theory of development that links the degree of market incompleteness to capital accumulation and growth. At early stages of development, the presence of indivisible projects limits the degree of risk spreading (diversification) that the economy can achieve. The desire to avoid highly risky investments slows down capital accumulation, and the inability to diversify idiosyncratic risks introduces a large amount of uncertainty in the growth process. The typical development pattern will consist of a lengthy period of "primitive accumulation" with highly variable output, followed by takeoff and financial deepening and, finally, steady growth. "Lucky" countries will spend relatively less time in the primitive accumulation stage and develop faster. Although all agents are price takers and there are no technological spillovers, the decentralized equilibrium is inefficient because individuals do not take into account their impact on others' diversification opportunities. We also show that our results generalize to economies with international capital flows.

JEL Classification: Q12, Q14, Q16, Q17, Q19

Suggested Citation

Acemoglu, Daron and Zilibotti, Fabrizio, Was Prometheus Unbound by Chance? Risk, Diversification, and Growth. Journal Of Political Economy Vol. 105, No. 4 August 1997, Available at SSRN: https://ssrn.com/abstract=41984

Daron Acemoglu (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Fabrizio Zilibotti

Yale University ( email )

New Haven, CT 06520
United States

Centre for Economic Policy Research (CEPR)

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United Kingdom

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