Heterogeneous Firms, Productivity and Poverty Traps

Abstract

We present a model of endogenous total factor productivity which generates poverty traps. We obtain multiple steady state equilibria for an arbitrarily small degree of increasing returns to scale. While the most productive firms operate across all the steady states, in a poverty trap less productive firms operate as well. This results in lower average firms productivity and lower TFP. Our model is consistent with cross-country empirical evidence on differences in productivity and employment distribution across firms. In our model a growth miracle is accompanied by a shift of employment from small to large firms, consistently with the Industrial Revolution and Japan's post-war growth experiences.

Keywords: endogenous productivity, multiple equilibria, poverty traps

JEL Classification: L16, O11, O33, O40