Distance to Frontier, Selection, and Economic Growth

In the same data, an industry that closes the gap to the frontier faster than other industries tends to increase its R&D intensity relative to them.

“Moreover, as an industry approaches the world technology frontier more rapidly than others it becomes relatively more R&D intensive.”

In the cross-sectional regression, the high- and low-barrier convergence coefficients are not statistically significantly different.

“the p-value at the bottom of the table shows that in this case we cannot reject the hypothesis that these two coefficients are equal given the standard errors in this cross-sectional regression.”

Adding controls for years of schooling leaves the panel pattern unchanged.

“The next column adds controls for years of schooling (we use male use of schooling from the Barro and Lee dataset), and the pattern is unchanged.”

There is typically excess demand for old entrepreneurs who are revealed to be high skill.

“But there will typically be an excess demand for old entrepreneurs who are revealed to be high skill.”

Young entrepreneurs operate small projects.

“Young entrepreneurs operate small projects (i.e., s * t (e = Y )=σ).”

• Also stated in: § 2. · plain

  “young entrepreneurs operate small projects (s * t (e = Y )=σ)”

The model shows the possibility of a non-convergence trap where an economy stops converging to the frontier.

“The figure shows the possibility of a non convergence trap, where an economy stops converging to the frontier.”

The world technology growth rate is given by equation (25): g equals one half of [(λ+σ+(1-λ)σ)η+(1+σ+(1-λ)σ)λγ] minus one.

“g = 1 2 [(λ + σ +(1-λ) σ) η +(1+σ +(1-λ) σ) λγ] -1,(25)”

• AssumptionThe authors state this as an assumption: The growth rate of the technology frontier is determined endogenously by the most advanced economy in the world pursuing the innovation-based strategy.
• AssumptionThe authors state this as an assumption: The world technology growth rate g is positive.

There is a threshold a_r(μ,δ) of distance to frontier such that old low-skill entrepreneurs are retained below it and terminated above it.

“Condition (20) defines a threshold level a r (µ, δ) ofthedistancetofron tiersuc hthatlo w-skill old entrepreneurs are retained (R =1 ) below this threshold but are terminated (R =0) above this threshold.”

The law of motion of a_t conditional on R_t is given by equation (23): if R_t=1, a_t equals (1+σ)/(2(1+g))(η+λγa_{t-1}); if R_t=0, a_t equals 1/(2(1+g))[(λ+σ+(1-λ)σ)η+(1+σ+(1-λ)σ)λγa_{t-1}].

“a t =      1+σ 2(1+g) [η + λγa t-1 ] if R t =1, 1 2(1+g) [(λ + σ +(1-λ) σ) η +(1+σ +(1-λ) σ) λγa t-1 ] if R t =0.(23)”

The necessary and sufficient condition for an equilibrium non-convergence trap is a_trap less than a_r(μ,δ).

“Therefore, the necessary and sufficient condition for an equilibrium non convergence trap is a trap <a r (µ, δ) , which corresponds to the case depicted in Figure 3.”

When condition (22) does not hold, moral hazard problems encourage termination of low-skill entrepreneurs.

“In contrast, when (22) does not hold, these problems encourage the termination of low-skill entrepreneurs.”

In equilibrium, old low-skill entrepreneurs are retained and operate large projects when a_{t-1} is below a_r(μ,δ), but are terminated when a_{t-1} is above a_r(μ,δ).

“old low-skill entrepreneur are retained (R t =1 ) and operate large projects (s * t (e = O, z = L)=1 )w h e na t-1 <a r (µ, δ) but are terminated (R t =0)w h e n a t-1 >a r (µ, δ)”

The threshold a_trap is given by equation (27): a_trap equals (1+σ)η divided by [2(1+g)-λγ(1+σ)].

“a trap = (1 + σ) η 2(1+g) -λγ (1 + σ) .(27)”

The effect of incentive problems μ on a_r(μ,δ) is ambiguous.

“However, the effect of incentive problems µ,ona r (µ, δ) is ambiguous.”

Equilibrium dynamics are given by a piecewise linear first-order difference equation.

“As (24) shows, equilibrium dynamics are given by a piecewise linear first-order difference equation.”

The full equilibrium law of motion is piecewise: if a_{t-1} is at most a_r(μ,δ), a_t equals (1+σ)/(2(1+g))(η+λγa_{t-1}); if a_{t-1} exceeds a_r(μ,δ), a_t equals 1/(2(1+g))[(λ+σ+(1-λ)σ)η+(1+σ+(1-λ)σ)λγa_{t-1}].

“a t =        1+σ 2(1+g) (η + λγa t-1 ) if a t-1 ≤ a r (µ, δ) 1 2(1+g) (λ + σ +(1-λ) σ) η +(1+σ +(1-λ) σ) λγa t-1 if a t-1 >a r (µ, δ) . (24)”

For the innovation-based strategy to generate higher growth than the investment-based strategy at the frontier a=1, it is necessary that (1-σ)η/σ is less than λγ.

“(1 -σ) η σ <λγ.(26)”

The R=1 line intersects the 45-degree line at some a_trap less than 1.

“But then, as drawn in Figure 3, the R =1line must intersect the 45-degree line at some a trap < 1.”

If an economy is pursuing the investment-based strategy when it reaches a=a_trap, it will stay there forever, falling into a non-convergence trap.

“If the economy is pursuing the investment-based strategy when it reaches a = a trap , then it will stay there forever.In other words, it will have fallen into a non convergence trap.”

If δ exceeds the threshold in condition (22), the retained-earnings effect dominates and a_r is increasing in μ, so more severe moral hazard encourages retention of low-skill entrepreneurs.

“If δ> (1 -φ) κ σηL 1+g 1+r(22) then the former effect dominates and a r is increasing in µ, so that more severe moral hazard problems encourage R =1.”

If a0 is below a_r and a_trap is at least a_r, the economy starts with investment-based strategy, switches to innovation-based at a=a_r, and converges to frontier a=1.

“If a 0 <a r (µ, δ) and a trap ≥ a r (µ, δ), then the economy starts with the investment-based strategy, switches to the innovation-based strategy at a = a r (µ, δ), and converges to the world technology frontier, a =1.”

The comparison between â and a_r(μ,δ) depends on the degree of competition δ.

“How does â compare to the equilibrium threshold a r (µ, δ)?T h ea n s w e rd epends on (among other things) the degree of competition as measured by δ.”

If a_r is at most a0, the economy starts with innovation-based strategy and converges to frontier a=1.

“If a r (µ, δ) ≤ a 0 , then the economy starts with the innovation-based strategy and converges to the world technology frontier, a =1.”

The growth-maximizing sequence starts with investment-based strategy and then switches to innovation-based strategy.

“Therefore, similar to the case of equilibrium behavior, the growth-maximizing sequence also starts with the investment-based strategy and then switches to an innovation-based strategy.”

The switch in the growth-maximizing sequence does not necessarily occur at the same point as in equilibrium.

“But the switch does not necessarily occur at the same point as in the equilibrium case.”

If a0 is below a_r and a_trap is below a_r, the economy starts investment-based and converges until a=a_trap<1, where both convergence and growth of a_t stop.

“If a 0 <a r (µ, δ) and a trap <a r (µ, δ), then the economy starts with the investment-based strategy and converges towards the world technology frontier until it reaches a = a trap < 1, where both convergence and the growth of a t stop.”

Growth is maximized when the economy reaches the highest level of a_t for a given a_{t-1}.

“Inspection of ( 23) or of Figure 2 immediately shows that growth will be maximized when the economy reaches the highest level of a t for a given a t-1 .”

Condition (26) ensures that â is less than 1.

“Condition ( 26) ensures that â<1.”

In the case δ > δ(μ), limiting competition by increasing δ would further increase the growth gap between equilibrium and growth-maximizing strategy.

“In this case, which is the one shown in Figure 3, limiting competition (i.e., increase δ) would further increase the growth gap between the equilibrium and the growth-maximizing strategy.”

Which of the two effects dominates is ambiguous.

“Which effect dominates is ambiguous.”

Politicians will be bribed to maintain the anticompetitive policy δ as long as a_{t-1} is at most a_L.

“This discussion immediately implies that politicians will be bribed to maintain the anticompetitive policy δ as long as a t-1 ≤ a L , which ensures that the left-hand side of ( 30) is greater than the right-hand inside.”

If a0 lies between a_H and a_L, the long-run outcome is history dependent.

“Finally, if a 0 ∈ (a H ,a L ), then the long-run outcome is history dependent.”

If competition is initially high, the economy converges to a = 1.

“However, if competition is initially high (δ t-1 = δ), capitalists make lower profits and do not have enough purchasing power to buy politicians.Consequently, in this case, there is no effective lobbying activity, procompetitive policies are never abandoned, and the economy converges to a =1.”

• AssumptionThe authors state this as an assumption: Politicians can be bribed to affect future policies and can commit to deliver promised competition policy.
• AssumptionThe authors state this as an assumption: Capitalists are credit constrained.

Politicians will be bribed to switch from procompetitive policy δbar to anticompetitive policy δ when a_{t-1} is at most a_H.

“Similarly, politicians will be bribed to switch from a procompetitive policy δ t-1 = δ to an anticompetitive policy δ when a t-1 ≤ a H .”

If the initial value of a lies between aH and aL, the long-run outcome depends on history.

“Finally, if a 0 ∈ (a H ,a L ), then the long-run outcome is history dependent.”

If competition is initially low, capitalists earn higher monopoly profits and are wealthy enough to successfully lobby to keep anticompetitive policies in place.

“If competition is initially low, δ t-1 = δ, capitalists enjoy greater monopoly profits and are sufficiently wealthy to lobby successfully to maintain the anticompetitive policies (δ t-1 = δ) in place; the equilibrium is identical to case 1 and eventually ends up in a non convergence trap.”

• AssumptionThe authors state this as an assumption: Politicians can be bribed to affect future policies and can commit to deliver promised competition policy.
• AssumptionThe authors state this as an assumption: Capitalists are credit constrained.

If competition is initially high, capitalists earn lower profits and lack enough purchasing power to buy politicians, so lobbying is ineffective and procompetitive policies are not abandoned.

“However, if competition is initially high (δ t-1 = δ), capitalists make lower profits and do not have enough purchasing power to buy politicians.Consequently, in this case, there is no effective lobbying activity, procompetitive policies are never abandoned, and the economy converges to a =1.”

• AssumptionThe authors state this as an assumption: Politicians can be bribed to affect future policies and can commit to deliver promised competition policy.
• AssumptionThe authors state this as an assumption: Capitalists are credit constrained.

Capitalists' first-period earnings depend on δ_{t-1}, the competition policy at t-1.

“Capitalists' first-period earnings, on the other hand, depend on δ t-1 , the competition policy at t -1.”

Under some conditions, old capitalists will be willing to pay the entire first-period revenue to increase their monopoly power.

“Under some conditions, old capitalists will be willing to pay the entire first-period revenue to increase their monopoly power.”

Capitalists will successfully bribe politicians when inequality (30) holds: δ_{t-1}(1-μ)σN(η+λγa_{t-1}) is at least H a_{t-1}.

“Therefore, capitalists will successfully bribe politicians when δ t-1 (1 -µ) σN (η + λγa t-1 ) ≥ Ha t-1 ,(30)”

Restricting competition creates static losses.

“Although restricting competition creates static losses (recall equation ( 6)),”

If competition is initially low, the economy eventually ends in a non-convergence trap.

“If competition is initially low, δ t-1 = δ, capitalists enjoy greater monopoly profits and are sufficiently wealthy to lobby successfully to maintain the anticompetitive policies (δ t-1 = δ) in place; the equilibrium is identical to case 1 and eventually ends up in a non convergence trap.”

• AssumptionThe authors state this as an assumption: Politicians can be bribed to affect future policies and can commit to deliver promised competition policy.
• AssumptionThe authors state this as an assumption: Capitalists are credit constrained.

In the growth regressions, the interaction between distance to frontier and high barriers is negative.

“Distance to frontier * high barriers -0.078 -0.062 -0.072 -0.109 -0.214 -0.245”

If φ is less than φbar, then δH is greater than δN.

“It is immediate to verify that if φ< φ then δ H >δ N (in particular, note that δ H is decreasing in φ and that δ H = δ N if and only if φ = φ).”

If σ is less than 1/(1+r) and N is sufficiently large, both participation constraints are slack even when entrepreneurs inject all their retained earnings.

“Therefore, if N ≥ max {N Y ,N O } then both participation constraints are slack, even when entrepreneurs inject all their retained earnings.”

• AssumptionThe authors state this as an assumption: Capitalists cannot commit to long-term contracts that condition payments to old entrepreneurs on whether they diverted funds in the first period.
• AssumptionThe authors state this as an assumption: Side payments from entrepreneurs to capitalists are not possible.
• AssumptionThe authors state this as an assumption: Young firms cannot hire old entrepreneurs.

If δ is greater than δL, then old entrepreneurs operate large projects.

“N o ww es h o wt h a t ,i fδ>δ L , then old entrepreneurs operate large projects.”

In the industry-level regressions, distance to frontier has a positive coefficient on R&D intensity.

“Distance to frontier 0.031 0.018 0.009 0.034 0.018 0.008”

If δ is less than δH, then for all a, young entrepreneurs are assigned to small projects.

“We first show that if δ<δ H then, for all a, young entrepreneurs are assigned to small projects.”

The myopic planner sets a_mfb less than â.

“Since the planner takes into account the cost of innovation, which is ignored by the growth-maximizing strategy, the myopic planner sets a mf b < â.”

Postponing the move to the innovation-based strategy lowers growth, since the economy fails to exploit innovation opportunities fully.

“Delayed switch to the innovation-based strategy reduces growth because the economy is not making best use of innovation opportunities.”

Because of the incentive compatibility constraint, profits are shared between the capitalist and the entrepreneur with shares 1-μ and μ after production.

“because of the incentive compatibility constraint (11) profits must be shared between the capitalist and the entrepreneur, with respective shares 1 -µ and µ, after production is realized.”

As a country nears the world frontier and has less room to adopt or imitate, it becomes less likely to keep failed entrepreneurs.

“A corollary is that, as an economy approaches the world technology frontier and there remains less room for adoption and imitation, retention of unsuccessful entrepreneurs becomes less likely.”

• AssumptionThe authors state this as an assumption: Innovation and selection become more important as an economy approaches the world technology frontier.

Public support for the investment-based strategy can be beneficial because the strategy might not arise on its own even when it would improve growth or welfare, a result of the appropriability effect.

“Furthermore, as suggested by Gerschenkron, government intervention to encourage the investment-based strategy might be useful because that strategy may otherwise fail to emerge even when it would be good for growth or welfare.”

• Also stated in: § Abstract · hedged

  “We show that relatively backward economies may switch out of the investment-based strategy too soon, so certain policies such as limits on product market competition or investment subsidies, that encourage the investment-based strategy may be beneficial.”

Earlier studies have not examined how institutions that boost growth at first may later slow it and produce a non-convergence trap.

“None of these papers, however, investigate how certain arrangements that are at first growth enhancing can later reduce growth and cause non convergence traps.”

• cites Greenwood and Jovanovic (1990)Not checked yet

  Not checked in the free run.

• cites King and Levine (1993)Not checked yet

  Not checked in the free run.

• cites Tong and Xu (2004)Not checked yet

  Not checked in the free run.

Credit-market imperfections and moral hazard can lead to underinvestment in equilibrium, with firms running small projects even when large projects are socially more efficient.

“Even when, absent moral hazard, it would be profitable for firms to pay the investment cost and operate the large project, credit-market imperfections and moral hazard can lead to underinvestment in equilibrium (i.e., firms may run small projects even though large projects are socially more efficient).”

Entrepreneurs are credit constrained, forcing capitalists to bear most or all of the investment cost while appropriating only a fraction 1-μ of returns.

“Entrepreneurs, however, are credit constrained, and this forces capitalists to bear the bulk (sometimes the whole) of the investment cost, although they appropriate only a fraction 1 -µ of the returns.”

Competition among old capitalists implies that the value of an old high-skill entrepreneur is no greater than the maximum of the value of an old low-skill entrepreneur and the expected value of a young entrepreneur.

“Competition between old capitalists then implies thatfoot_7 V * t (e = O, z = H) ≤ max[V * t (e = O, z = L) ,E t V * t (e = Y )].(15)”

A development threshold exists: if an economy remains in the investment-based strategy past it, it becomes trapped and convergence to the frontier ceases.

“More important, there exists a level of development (distance to frontier) such that, if an economy does not switch out of the investment-based strategy before this threshold, it will be stuck in a non convergence trap where convergence to the frontier stops.”

• AssumptionThe authors state this as an assumption: Innovation and selection become more important as an economy approaches the world technology frontier.

In the long run, the investment-based strategy may impose social costs: the rent-shield effect can dominate the appropriability effect and keep an economy in that strategy longer than desirable.

“Nevertheless, our analysis also reveals that the investment-based strategy can be socially costly in the long run.”

• Also stated in: § 1 I · hedged

  “This effect can outweigh the appropriability effect and imply that an economy may stay in the investmentbased strategy too long.”

• Also stated in: § Abstract · hedged

  “However, these policies may have significant long-run costs because they make it more likely that a society will be trapped in the investment-based strategy and fail to converge to the world technology frontier.”

Underinvestment is more severe when firms hire young entrepreneurs with no wealth, forcing capitalists to bear the entire investment cost.

“The underinvestment problem tends to be more severe when firms hire young entrepreneurs who have no wealth and so force capitalists to bear the entire investment cost.”

In the parameter region where δ lies between δ_L and δ_H, refinancing an old low-skill entrepreneur may be profitable because it mitigates the credit-market imperfection.

“we now restrict attention to the region of the parameter space where the trade-off emphasized in this paper emerges more clearly: refinancing an old entrepreneur who has proven to be of low skill may be profitable because it mitigates the credit-market imperfection.”

An equilibrium with R_t=1 corresponds to an investment-based strategy with greater investments, longer-term relationships, and protection of older entrepreneurs from younger competition.

“we can think of an equilibrium with R t =1as corresponding to an investment-based strategy, where firms undertake greater investments even at the expense of sacrificing entrepreneurial selection.This strategy involves longer-term relationships (entrepreneurs are never terminated) and the protection of older entrepreneurs from the competition of younger ones.”

A higher δ implies greater profits and retained earnings for old entrepreneurs, which they use to shield themselves against competition from young entrepreneurs, making their retention more likely.

“Second, as shown by ( 17), ah i g h e rδ implies greater profits and greater retained earnings for old entrepreneurs, which they can use to shield themselves against competition from young entrepreneurs, making their own retention more likely.”

A higher μ reduces the profit differential between hiring a young versus an old low-skill entrepreneur.

“On the other hand, a higher µ reduces the profit differential between hiring a young versus an old low-skill entrepreneur.”

Old entrepreneurs can bear part of the investment cost by injecting retained earnings.

“Old entrepreneurs, in contrast, can bear part of the cost by injecting their retained earnings.”

If there is no switch to the innovation-based regime, the economy gets stuck in a non-convergence trap and will not converge to the frontier.

“Second, if there is no switch to the innovation-based regime, the economy will get stuck in a non convergence trap and will not converge to the frontier.”

The analysis may shed light on why some economies such as Brazil, Mexico, and Peru, which initially grew rapidly with protectionist policies, were overtaken by economies such as Hong Kong and Singapore with more competitive policies.

“It may also shed some light on why some economies (e.g.Brazil, Mexico, Peru) that initially grew relatively rapidly with highly protectionist policies were then overtaken by economies (e.g.Hong Kong, Singapore), with more competitive policies.”

Starting from an economy with â exceeding a_r and a_{t-1} between a_r and â, an increase in δ may induce the investment-based strategy and secure more rapid growth.

“For example, starting with an economy featuring â>a r (µ, δ) and a t-1 ∈ (a r (µ, δ) , â), an increase in δ (a reduction in competition) may induce the investment-based strategy in this range and secure more rapid growth.”

The result illustrates that rigid institutions associated with less competitive market structures supporting investment-based strategy become more costly as an economy approaches the world technology frontier.

“This result further illustrates the claim made in the Introduction that those rigid institutions associated with the less competitive market structures supporting the investment-based strategy become more costly as an economy approaches the world technology frontier.”

In an equilibrium allocation with a_r(μ,δ) below â, a policy intervention that encourages greater investment will increase growth over the range a between a_r(μ,δ) and â.

“Consider an equilibrium allocation with a r (µ, δ) < â,w h e r et h ee c o n o m y switches out of the investment-based strategy before the growth-maximizing threshold.A policy intervention that encourages greater investment will increase growth over the range a ∈ (a r (µ, δ) , â).”

Limiting product market competition may later become harmful to growth, preventing convergence to the frontier.

“However, our previous discussion of non convergence traps also underscored that limiting product market competition may later become harmful to growth, preventing convergence to the frontier.”

Less competitive environments may foster growth at early stages of development, far from the technology frontier.

“One implication of the foregoing discussion is that less competitive environments may foster growth at early stages of development (far from the technology frontier).”

For some parameter values far from the world technology frontier, the growth rate can be increased by inducing the economy to stay longer in the investment-based regime.

“Finally, for some parameter values far from the world technology frontier, the growth rate can be increased by inducing the economy to stay longer in the investment-based regime.”

Low competition may have detrimental effects in the long run.

“Low competition, on the other hand, may have detrimental effects in the long-run.”

Starting from a_r(μ,δ) below â, anticompetitive policies close the gap between the equilibrium threshold and the growth-maximizing threshold.

“Starting from a situation where a r (µ, δ) < â, anticompetitive policies close the gap between the equilibrium threshold and the growth-maximizing threshold.”

The dynamic equilibrium typically starts with an investment-based regime featuring high investment and long-term relationships, then switches to an innovation-based regime featuring lower investment, younger firms, and more selection as the economy approaches the frontier.

“First, the dynamic equilibrium typically starts with the investment-based regime, which features high investment and long-term relationships.As the economy approaches the world technology frontier, this is followed by a switch to an innovation-based regime featuring lower investment, younger firms and more selection.”

This type of intervention may have long-run costs unless it is abandoned at later stages of development.

“However, the second observation points out that this type of intervention may have long-run costs unless it is abandoned at later stages of development.”

Capitalists will be able to bribe politicians as long as their maximum bribe, given by first-period earnings, exceeds the cost of buying politics.

“This implies that they will be able to bribe the politicians as long as the maximum bribe they can pay which is given by their first-period earnings exceeds the cost of buying politics.”

To the extent that economic power buys political power, groups enriched by anticompetitive policies can be influential in opposing changes.

“To the extent that economic power buys political power, say, via lobbying, these groups can be quite influential in opposing such changes.”

The other steady-state political equilibrium leads to a political economy trap with investment-based strategy throughout and no convergence to the frontier.

“One of these eventually leads to procompetitive policies and an innovation-based equilibrium, ensuring convergence to the world technology frontier; the other leads to a political economy trap, with investmentbased strategy throughout and no convergence to the frontier.”

• AssumptionThe authors state this as an assumption: Politicians can be bribed to affect future policies and can commit to deliver promised competition policy.
• AssumptionThe authors state this as an assumption: Capitalists are credit constrained.

Institutions appropriate for early stages of development become inappropriate for an economy close to the frontier.

“Institutions that are appropriate for early stages of development therefore become inappropriate for an economy close to the frontier.”

When the model is extended with a political process of possible lobby capture of politicians, it predicts multiple steady-state political equilibria.

“In conclusion, when our theory is augmented with a stylized political process describing the possible capture of politicians by lobbies, it predicts multiple steady state political equilibria.”

• AssumptionThe authors state this as an assumption: Politicians can be bribed to affect future policies and can commit to deliver promised competition policy.
• AssumptionThe authors state this as an assumption: Capitalists are credit constrained.

The presence of retained earnings that incumbent entrepreneurs can use to shield themselves from competition makes the investment-based strategy persist for too long.

“In contrast, the presence of retained earnings that incumbent entrepreneurs can use to shield themselves from competition makes the investment-based strategy persist for too long.”

• AssumptionThe authors state this as an assumption: Capitalists cannot commit to long-term contracts that condition payments to old entrepreneurs on whether they diverted funds in the first period.
• AssumptionThe authors state this as an assumption: Side payments from entrepreneurs to capitalists are not possible.
• AssumptionThe authors state this as an assumption: Young firms cannot hire old entrepreneurs.

The organization of firms and production should be different in industries closer to the world technology frontier.

“In particular, our analysis suggests that the organization of firms and of production should be different in industries that are closer to the world technology frontier.”

• AssumptionThe authors state this as an assumption: Capitalists cannot commit to long-term contracts that condition payments to old entrepreneurs on whether they diverted funds in the first period.
• AssumptionThe authors state this as an assumption: Side payments from entrepreneurs to capitalists are not possible.
• AssumptionThe authors state this as an assumption: Young firms cannot hire old entrepreneurs.

The same reasoning extends to cross-industry comparisons.

“Even though much of the emphasis in this paper is on cross-country comparisons, the same reasoning also extends to cross-industry comparisons.”

• AssumptionThe authors state this as an assumption: Capitalists cannot commit to long-term contracts that condition payments to old entrepreneurs on whether they diverted funds in the first period.
• AssumptionThe authors state this as an assumption: Side payments from entrepreneurs to capitalists are not possible.
• AssumptionThe authors state this as an assumption: Young firms cannot hire old entrepreneurs.

A standard appropriability effect, because firms do not internalize the greater consumer surplus they create by investing more, implies that the switch tends to occur too soon.

“A standard appropriability effect, resulting from the fact that firms do not internalize the greater consumer surplus they create by investing more, implies that the switch tends to occur too soon.”

• AssumptionThe authors state this as an assumption: Capitalists cannot commit to long-term contracts that condition payments to old entrepreneurs on whether they diverted funds in the first period.
• AssumptionThe authors state this as an assumption: Side payments from entrepreneurs to capitalists are not possible.
• AssumptionThe authors state this as an assumption: Young firms cannot hire old entrepreneurs.

Firms in countries far from the technology frontier pursue an investment-based strategy.

“Since the selection of high-skill entrepreneurs and firms is more important for innovation than for adoption, firms in countries that are far from the technology frontier pursue an investment-based strategy, which features long-term relationships, high average size and age of firms, large investments, but little selection.”

• AssumptionThe authors state this as an assumption: Capitalists cannot commit to long-term contracts that condition payments to old entrepreneurs on whether they diverted funds in the first period.
• AssumptionThe authors state this as an assumption: Side payments from entrepreneurs to capitalists are not possible.
• AssumptionThe authors state this as an assumption: Young firms cannot hire old entrepreneurs.

Anticompetitive policies can lead to a non-convergence trap in which the economy never switches out of the investment-based strategy and fails to converge to the world technology frontier.

“Nevertheless, anticompetitive policies can also lead to a non convergence trap whereby the economy never switches out of the investment-based strategy and fails to converge to the world technology frontier.”

• AssumptionThe authors state this as an assumption: Capitalists cannot commit to long-term contracts that condition payments to old entrepreneurs on whether they diverted funds in the first period.
• AssumptionThe authors state this as an assumption: Side payments from entrepreneurs to capitalists are not possible.
• AssumptionThe authors state this as an assumption: Young firms cannot hire old entrepreneurs.

Selection of high-skill entrepreneurs and firms is more important for innovation than for adoption.

“Since the selection of high-skill entrepreneurs and firms is more important for innovation than for adoption, firms in countries that are far from the technology frontier pursue an investment-based strategy, which features long-term relationships, high average size and age of firms, large investments, but little selection.”

• AssumptionThe authors state this as an assumption: Capitalists cannot commit to long-term contracts that condition payments to old entrepreneurs on whether they diverted funds in the first period.
• AssumptionThe authors state this as an assumption: Side payments from entrepreneurs to capitalists are not possible.
• AssumptionThe authors state this as an assumption: Young firms cannot hire old entrepreneurs.

The closer an economy is to the world technology frontier, the greater the relative importance of innovation versus imitation as a source of productivity growth.

“The closer an economy is to the world technology frontier, the higher the relative importance of innovation relative to imitation as a source of productivity growth.”

• AssumptionThe authors state this as an assumption: Capitalists cannot commit to long-term contracts that condition payments to old entrepreneurs on whether they diverted funds in the first period.
• AssumptionThe authors state this as an assumption: Side payments from entrepreneurs to capitalists are not possible.
• AssumptionThe authors state this as an assumption: Young firms cannot hire old entrepreneurs.

Government policy aimed at improving short-run resource allocation, such as encouraging investment-based strategy, may have unintended adverse long-run consequences.

“Second, it also suggests that potentially well-meaning government policy directed at improving the short run allocation of resources (e.g., by encouraging the investment-based strategy) may have unintended adverse long-run consequences.”

• AssumptionThe authors state this as an assumption: Politicians can be bribed to affect future policies and can commit to deliver promised competition policy.
• AssumptionThe authors state this as an assumption: Capitalists are credit constrained.

An economy with sufficiently high μ and δN switches to an innovation-based strategy too late.

“Therefore, an economy with sufficiently high µ and δN will switch to an innovation-based strategy too late, since it would feature a r (µ, δ) > â.”

Closer to the technology frontier, there is an equilibrium switch to an innovation-based strategy.

“Closer to the technology frontier, there is less room for copying and adoption of well-established technologies; consequently, there is an equilibrium switch to an innovation-based strategy with short-term relationships, younger firms, less investment and better selection of entrepreneurs.”

• AssumptionThe authors state this as an assumption: Capitalists cannot commit to long-term contracts that condition payments to old entrepreneurs on whether they diverted funds in the first period.
• AssumptionThe authors state this as an assumption: Side payments from entrepreneurs to capitalists are not possible.
• AssumptionThe authors state this as an assumption: Young firms cannot hire old entrepreneurs.

Economies may switch out of the investment-based strategy too soon or too late.

“We showed that economies may switch out of the investment-based strategy too soon or too late.”

• AssumptionThe authors state this as an assumption: Capitalists cannot commit to long-term contracts that condition payments to old entrepreneurs on whether they diverted funds in the first period.
• AssumptionThe authors state this as an assumption: Side payments from entrepreneurs to capitalists are not possible.
• AssumptionThe authors state this as an assumption: Young firms cannot hire old entrepreneurs.

Political economy traps are more likely when there are fewer checks and balances on politicians.

“First, since a H and a L are decreasing in H, the analysis demonstrates that political economy traps are more likely when there are fewer checks and balances on politicians.”

• AssumptionThe authors state this as an assumption: Politicians can be bribed to affect future policies and can commit to deliver promised competition policy.
• AssumptionThe authors state this as an assumption: Capitalists are credit constrained.

Closer to the technology frontier, there is less room for copying and adopting well-established technologies.

“Closer to the technology frontier, there is less room for copying and adoption of well-established technologies; consequently, there is an equilibrium switch to an innovation-based strategy with short-term relationships, younger firms, less investment and better selection of entrepreneurs.”

• AssumptionThe authors state this as an assumption: Capitalists cannot commit to long-term contracts that condition payments to old entrepreneurs on whether they diverted funds in the first period.
• AssumptionThe authors state this as an assumption: Side payments from entrepreneurs to capitalists are not possible.
• AssumptionThe authors state this as an assumption: Young firms cannot hire old entrepreneurs.