Was Prometheus unbound by chance? Risk diversification and growth

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


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Original Publication URL: http://dx.doi.org/10.1086/262091


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.

Item Type: Article
Digital Object Identifier (DOI): doi:10.1086/262091
ISSNs: 0036-9292 (print)
Related URLs:
Subjects: H Social Sciences > HG Finance
H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
Divisions : University Structure - Pre August 2011 > School of Social Sciences > Economics
ePrint ID: 33088
Accepted Date and Publication Date:
August 1997Published
Date Deposited: 13 Dec 2007
Last Modified: 06 Aug 2015 02:30
URI: http://eprints.soton.ac.uk/id/eprint/33088

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