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Was Prometheus unbound by chance? Risk diversification and growth

Was Prometheus unbound by chance? Risk diversification and growth
Was Prometheus unbound by chance? Risk diversification and growth
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 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 risk 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.
0036-9292
709-751
Acemoglu, Daron
65f934f6-a9af-44ad-bbbb-cd8308891ab5
Zilibotti, Fabrizio
4e5e129e-cb11-4b09-8ba4-ce400e638712
Acemoglu, Daron
65f934f6-a9af-44ad-bbbb-cd8308891ab5
Zilibotti, Fabrizio
4e5e129e-cb11-4b09-8ba4-ce400e638712

Acemoglu, Daron and Zilibotti, Fabrizio (1997) Was Prometheus unbound by chance? Risk diversification and growth. The Scottish Journal of Political Economy, 105 (4), 709-751. (doi:10.1086/262091).

Record type: Article

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 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 risk 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.

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Published date: August 1997
Organisations: Economics

Identifiers

Local EPrints ID: 33088
URI: http://eprints.soton.ac.uk/id/eprint/33088
ISSN: 0036-9292
PURE UUID: 2aeea04d-35f8-4314-a751-2a5cbcd6f2e0

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Date deposited: 13 Dec 2007
Last modified: 15 Mar 2024 07:41

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Contributors

Author: Daron Acemoglu
Author: Fabrizio Zilibotti

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