Growth Theory Through the Lens of Development Economics

90 Pages Posted: 5 Feb 2005

See all articles by Abhijit V. Banerjee

Abhijit V. Banerjee

Massachusetts Institute of Technology (MIT) - Department of Economics

Esther Duflo

Massachusetts Institute of Technology (MIT) - Department of Economics; Abdul Latif Jameel Poverty Action Lab (J-PAL); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Bureau for Research and Economic Analysis of Development (BREAD)

Date Written: December 2004

Abstract

Growth theory 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 microdevelopment 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 not 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.

Keywords: Non-aggregative growth theory, aggregate production function, factor

JEL Classification: O0, O10, O11, O12, O14, O15, O16, O40

Suggested Citation

Banerjee, Abhijit V. and Duflo, Esther, Growth Theory Through the Lens of Development Economics (December 2004). MIT Department of Economics Working Paper No. 05-01. Available at SSRN: https://ssrn.com/abstract=651483 or http://dx.doi.org/10.2139/ssrn.651483

Abhijit V. Banerjee (Contact Author)

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

50 Memorial Drive
Room E52-252D
Cambridge, MA 02142
United States
617-253-8855 (Phone)
617-253-6915 (Fax)

Esther Duflo

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

50 Memorial Drive
Room E52-544
Cambridge, MA 02139
United States
617-258-7013 (Phone)
617-253-6915 (Fax)

Abdul Latif Jameel Poverty Action Lab (J-PAL) ( email )

Cambridge, MA
United States

HOME PAGE: http://www.povertyactionlab.org/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Bureau for Research and Economic Analysis of Development (BREAD) ( email )

Duke University
Durham, NC 90097
United States

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