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Smithian growth through creative organization
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Legros, Patrick, Newman, Andrew F. and Proto, Eugenio (2012) Smithian growth through creative organization. Working Paper. Coventry, UK: Department of Economics, University of Warwick. Warwick economics research paper series (TWERPS) (Number 981). (Unpublished)
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Text (Working paper)
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Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
Abstract
We consider a 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 labor, 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 depends on the interaction of the markets for labor and for inventions. A high level of specialization is chosen when the wage share is low. But low wage shares arise only when there are few entrepreneurs, which limits the market for innovations therefore and discourages inventive activity. When there are many entrepreneurs, the innovation market is large, but the rate of invention is low because there is little specialization. Rapid technological progress therefore requires a balance between these opposing effects, which occurs with a moderate relative scarcity of entrepreneurs and workers. In a dynamic version of the model in which a credit constraint limits entry into entrepreneurship, this relative scarcity depends on the wealth distribution, which evolves endogenously. There is an inverted-U relation between growth rates driven by innovation and the level of inequality. Institutional improvements have ambiguous effects on growth. In light of the model, we offer a reassessment of the mechanism by which organizational innovations such as the factory may have spawned the industrial revolution.
Item Type: | Working or Discussion Paper (Working Paper) | ||||
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Subjects: | H Social Sciences > HB Economic Theory | ||||
Divisions: | Faculty of Social Sciences > Economics | ||||
Library of Congress Subject Headings (LCSH): | Smith, Adam, 1723-1790 -- Criticism and interpretation, Division of labor, Technological innovations, Economics -- Mathematical theory | ||||
Series Name: | Warwick economics research paper series (TWERPS) | ||||
Publisher: | Department of Economics, University of Warwick | ||||
Place of Publication: | Coventry, UK | ||||
Official Date: | February 2012 | ||||
Dates: |
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Number: | Number 981 | ||||
Institution: | University of Warwick | ||||
Status: | Not Peer Reviewed | ||||
Publication Status: | Unpublished | ||||
Access rights to Published version: | Open Access (Creative Commons) | ||||
Version or Related Resource: | Legros, Patrick, et al. (2012). Smithian growth through creative organization. Coventry: Department of Economics, University of Warwick. (CAGE Working Paper Series no.77). http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/research/papers/77.2012_proto.pdf |
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