Smithian Growth Through Creative Organization

38 Pages Posted: 9 Aug 2006

See all articles by Patrick Legros

Patrick Legros

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Northeastern University, department of economics; Centre for Economic Policy Research (CEPR)

Andrew F. Newman

Boston University - Department of Economics

Eugenio Proto

University of Glasgow; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: June 2006

Abstract

We consider an endogenous growth model in which appropriate organization fosters innovation, but because of contractibility problems, this benefit cannot be internalized. The organizational design element we focus on is the division of labour, which as Adam Smith argued, facilitates invention by observers of the production process. However, entrepreneurs choose its level only to facilitate monitoring their workers. Whether there is innovation and growth depends on the interaction of the markets for labour and for inventions. Because of a credit market imperfection, the relative scarcity of entrepreneurs and workers depends on the wealth distribution. A high level of specialization is chosen when the wage share is low, i.e. when there are few wealthy. But in this case there are also few entrepreneurs and a consequent small market for innovations, which discourages inventive activity. When there are many wealthy, the innovation market is large, but the rate of invention is low because there is little specialization. Sustained technological progress and economic growth therefore require only moderate levels of inequality. The model also suggests that the growth rate need not be monotonic in the "quality of institutions," such as the degree of credit market imperfection.

Keywords: Technical change, division of labour, organization theory

JEL Classification: O3

Suggested Citation

Legros, Patrick and Newman, Andrew F. and Proto, Eugenio, Smithian Growth Through Creative Organization (June 2006). CEPR Discussion Paper No. 5709, Available at SSRN: https://ssrn.com/abstract=923457

Patrick Legros (Contact Author)

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

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Northeastern University, department of economics ( email )

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Andrew F. Newman

Boston University - Department of Economics ( email )

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Eugenio Proto

University of Glasgow ( email )

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