Economies at early stages of development are frequently shaken by large changes in growth rates, whereas growth in advanced economies tends to be relatively stable. To explain this pattern, we propose a theory of technological diversification. Production makes use of input-varieties that are subject to imperfectly correlated shocks. Endogenous variety adoption by firms raises average productivity and provides diversification benefits against variety-specific shocks. The volatility decline thus arises as a by-product of the development process. We quantitatively assess the model’s predictions and find that for reasonable parametrizations, it can generate a decline in volatility with development consistent with empirical patterns.
Please cite as
Miklós Koren and Silvana Tenreyro, 2013. “Technological Diversification.” American Economic Review. 103(1), pp. 378-414. bib