Comparative Advantage, Complexity and Volatility
Less developed countries tend to experience higher output volatility, a fact that is, in part, explained by their specialization in more volatile sectors. This paper proposes theoretical explanations for this pattern of specialization -- with the complexity of the goods playing a central role. Specifically, less developed countries with low levels of human capital, or alternately, with lower institutional ability to enforce contracts, will specialize in less complex goods which are also characterized by higher levels of output volatility. We provide novel empirical evidence that less complex industries are indeed more volatile.
We are grateful to Arnaud Costinot, Miklos Koren and workshop participants at the University of Michigan and the 2009 AEA Meetings for helpful suggestions. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Krishna, Pravin & Levchenko, Andrei A., 2013. "Comparative advantage, complexity, and volatility," Journal of Economic Behavior & Organization, Elsevier, vol. 94(C), pages 314-329. citation courtesy of