Creative Destruction, Distance to Frontier, and Economic Development
We construct a model of creative destruction with endogenous firm dynamics. We integrate the theory into a general equilibrium multi-country model of technological convergence where countries interact via international spillovers. We derive implications for both firm dynamics and aggregate productivity dynamics. In richer economies, firms are on average larger and the best firms grow larger over time. In poorer economies, there is little creative destruction, low selection, and firms remain small. We estimate the parameters of the model using firm-level data for India and the United States. We study the effect of counterfactual policy reforms. Industrial policy that selectively targets the more productive firms can be beneficial in poor countries while being harmful in countries close to the economic frontier. The findings echo Acemoglu et al. (2006).
I hereby declare that I have no relevant or material financial interests that relate to the research described in the paper “Creative Destruction, Distance to Frontier, and Economic Development”. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.