TY  - JOUR
AU  - Ades,Alberto F.
AU  - Glaeser,Edward L.
TI  - Evidence on Growth, Increasing Returns and the Extent of the Market
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4714
PY  - 1994
Y2  - April 1994
UR  - http://www.nber.org/papers/w4714
L1  - http://www.nber.org/papers/w4714.pdf
N1  - Author contact info:
Alberto Ades
Goldman Sachs & Co.
85 Broad Street
25th Floor
New York, NY  10004
E-Mail: no email available

Edward L. Glaeser
Department of Economics
315A Littauer Center
Harvard University
Cambridge, MA 02138
Tel: 617/495-0575
Fax: 617/495-7730
E-Mail: eglaeser@harvard.edu
AB  - We examine two sets of economies, (19th century U.S. states and 20th century less developed countries) where growth rates are positively correlated with initial levels of development to document how these dynamic increasing returns operate.  We find that open economies do not display a positive connection between initial levels and later growth; instead, closed economies do display this positive correlation (i.e. divergence).  This evidence suggests that increasing returns operate by expanding the extent of the market (as in the big push theories of Murphy, Shleifer and Vishny (1989)).  For U.S. states, we also find that larger markets enhance growth by increasing the division of labor.  Among LDCs, while more diversified production increases growth, diversification is negatively associated with openness for the poorest economies (as in the quality ladder theories of Boldrin and Scheinkman (1988), Young (1991) and Stokey (1991)). However, and despite the negative effect that openness has on the diversity of production and, thus, on growth, we find that openness still substantially increases growth for these poorer economies.
ER  -