Pietro
F. Peretto Professor Department of Economics Duke University Room 241, Department of Economics Duke University, Durham, NC 27708 (USA) Phone: (919) 660-1807 Fax: (919) 684-8974 Email: peretto@econ.duke.edu Office Hours: T, Th. 10-12 or by appointment |

Growth, Macroeconomics, Industrial Organization, International Economics

See Curriculum Vitae

From Smith to Schumpeter: A Theory of Take-off and Convergence to Sustained Growth

This paper develops a theory of the emergence of modern innovation-driven Schumpeterian growth. It uses a tractable model that yields a closed-form solution, consisting of an S-shaped (i.e., logistic-like) time path of firm size and a set of equations that express the relevant endogenous variables -- GDP, product variety and product quality, consumption, the shares of GDP earned by the factors of production -- as functions of firm size. It also obtains closed-form solutions for the dates of the events that drive the economy's phase transitions as functions of the fundamentals. The resulting path of GDP per capita consists of a convex-concave profile replicating the key feature of long-run data: an accelerating phase followed by a deceleration with convergence to a stationary growth rate. Compared to other availables theories, the paper focuses on the within-industry forces that regulate the response of firms and entrepreneurs to Smithian market expansion.

Endogenous Growth and Property Rights Over Renewable Resources (with Nujin Suphaphiphat and Simone Valente)

We analyze the general-equilibrium effects of alternative regimes of access rights over renewable natural resources -- namely, open access versus full property rights -- on the pace of development when economic growth is endogenously driven by both horizontal and vertical innovations. Resource exhaustion may occur under both regimes but is more likely to arise under open access. Under full property rights, positive resource rents increase expenditures and temporarily accelerate productivity growth, but also yield a higher resource price at least in the short-to-medium run. We characterize analytically the welfare effect of a regime switch induced by a failure in property rights enforcement: switching to open access is welfare reducing if the utility gain generated by the initial drop in the resource price is more than offset by the static and dynamic losses induced by reduced expenditure.

Growth on a Finite Planet: Resources, Technology and Population in the Long Run (with Simone Valente)We study the interactions between technological change, resource scarcity and population dynamics in a Schumpeterian model with endogenous fertility. We find a pseudo-Malthusian equilibrium in which population is constant and determined by resource scarcity while income grows exponentially. If labor and resources are substitutes in production, income and fertility dynamics are self-balancing and the pseudo-Malthusian equilibrium is the global attractor of the system. If labor and resources are complements, income and fertility dynamics are self-reinforcing and drive the economy towards either demographic explosion or collapse. Introducing a minimum resource requirement per capita, we obtain constant population even under complementarity.

Resources, Innovation and Growth in the Global Economy (with Simone Valente), Journal of Monetary Economics (2011), 58, 387-399.The relative performance of open economies is analyzed in an endogenous growth model with asymmetric trade. A resource-rich country trades resource-based intermediates for final goods produced by a resource-poor economy. The effects of an increase in the resource endowment depend on the elasticity of substitution between resources and labor in intermediates' production. Under substitution (complementarity), the resource boom generates higher (lower) income, lower (higher) employment in the primary sector and faster (slower) growth in the resource-rich economy. In the resource-poor economy, the shock induces a higher (lower) relative wage and positive (negative) growth effects that are exclusively due to trade.

Credit Quantity And Credit Quality: Bank Competition And Capital Accumulation (with Nicola Cetorelli),In this paper we show that bank competition has an intrinsically ambiguous impact on capital accumulation and growth. We further show that banking market structure is also responsible for the emergence of development traps in economies that otherwise would be characterized by unique steady state equilibria. These predictions explain the conflicting evidence gathered from recent empirical studies on the role of bank competition for the real economy. We obtain these results developing a dynamic, general equilibrium model of capital accumulation where banks operate in a Cournot oligopoly. More banks lead to a higher quantity of credit available to entrepreneurs, but also to diminished incentives to screen loan applicants, thus to poorer capital allocation. We also show that conditioning on economic parameters describing the quality of the entrepreneurial population resolves the theoretical ambiguity. In economies where prospective entrepreneurs are on average of low quality, hence where screening is especially beneficial, less competition leads to higher capital accumulation. The opposite is true where entrepreneurs are innately of higher quality.

Sustaining The Goose That Lays The Golden Egg: A Continuous Treatment Of Technological Transfer (with Nelson Są and Michelle Connolly), Scottish Journal of Political Economy (2009), 56, 492-507.

This paper proposes a simple model of the trade-offs perceived by innovating firms when investing in countries with limited intellectual property rights (IPR). The model allows for a continuous treatment of technology transfer and production cost gains occurring through FDI. While it does not consider possible changes in rates of innovation caused by changes in intellectual property rights in developing countries, it allows one to uncover a potentially non-monotonic relationship between welfare and IPR in the recipient country.

Resource abundance, growth and welfare: A Schumpeterian perspective, Journal of Development Economics (2012), 97, 142-155.

This paper takes a new look at the long-run implications of resource
abundance. It develops a Schumpeterian model of endogenous growth that
incorporates an upstream resource-intensive sector and yields an
analytical solution for the transition path. It then derives conditions
under which, as the economy's endowment of a natural resource rises,
(i) growth accelerates and welfare rises, (ii) growth decelerates but
welfare rises nevertheless, and (iii) growth decelerates and welfare
falls. Which of these scenarios prevails depends on the response of the
natural resource price to an increase in the resource endowment. The
price response determines the change in income earned by the owners of
the resource (the households) and thereby the change in their
expenditure on manufacturing goods. Since manufacturing is the
economy's innovative sector, this income-to-expenditure effect links
resource abundance to the size of the market for manufacturing goods
and drives how resource abundance affects incentives to undertake
innovative activity.

Factor-Eliminating Technological Change (with John Seater), Journal of Monetary Economics (2013), 60, 459–473.

Perpetual growth requires offsetting diminishing returns to
reproducible factors of produc- tion. In this article we present a
theory of factor elimination. For simplicity and clarity, there is no
augmentation of non-reproducible factors, thus excluding the standard
engine of growth. By spending resources on R&D, agents learn to
change the exponents of a Cobb– Douglas production function. We obtain
the economy's balanced growth path and complete transition dynamics.
The theory provides a mechanism for the transition from an initial
technology incapable of supporting perpetual growth to one with
constant returns to reproducible factors that supports it.

This paper studies
the effects of a tax on energy use in a growth model where market
structure is endogenous and jointly determined with the rate of
technological change. Because this economy does not exhibit the scale
effect (a positive relation between TFP growth and aggregate R&D),
the tax has no effect on the steady-state growth rate. It has, however,
important transitional effects that give rise to surprising results.
Specifically, under the plausible assumption that energy demand is
inelastic, there exists a hump-shaped relation between the energy tax
and welfare. This shape stems from the fact that the reallocation of
resources from energy production to manufacturing triggers a temporary
acceleration of TFP growth that generates a ✓-shaped time profile of
consumption. If endogenous technological change raises consumption
sufficiently fast and by a sufficient amount in the long run, the tax
raises welfare despite the fact that -- in line with standard intuition
-- it lowers consumption in the short run.

I develop a tractable growth model that allows me to study
analytically transition dynamics and welfare in response to a
deficit-financed cut of the tax rate on distributed dividends. I then
carry out a quantitative assessment of the Job Growth and Taxpayer
Relief Reconciliation Act (JGTRRA) of 2003. I find that the Act
produces lower steady-state growth despite the fact that the economy's
saving and employment ratios rise. Most importantly, it produces a
welfare loss of 19.34% of annual consumption per capita --- a
substantial effect driven by the fact that the steady-state growth rate
falls from 2% to 1.08%.

**A Schumpeterian Analysis of Deficit-Financed Dividend Tax Cuts**

The Employment (and Output) of Nations: Theory and Policy Implications

I
study the effects of product
and labor market frictions in a dynamic general equilibrium model with
a
three-state representation of the labor market. Firms bargain with
unions over
wages and employment levels. This generates unemployment. Households
take the
associated unemployment risk as given in making participation and
consumption-saving decisions. Unemployment harms output because it
inserts a
wedge between labor supply (participation) and employment. New firms
make entry
decisions based on expected future profitability as determined by
macroeconomic
conditions. The model produces dynamics consistent with the long-run
trends
exhibited by the

*Journal of Economic
Growth* (2007), 12, 329-350.

Fixed operating costs
draw a sharp distinction between endogenous growth based on horizontal
and vertical innovation: a larger number of product lines puts pressure
on an economy's resources; greater productivity of existing product
lines does not. Consequently, the only plausible engine of growth is
vertical innovation whereby progress along the quality or cost ladder
does not require the replication of fixed costs. Is, then, product
variety expansion irrelevant? No. The two dimensions of technology are
complementary in that using one and the other produces a more
comprehensive theory of economic growth. The vertical dimension allows
growth unconstrained by endowments, the horizontal provides the
mechanism that translates changes in aggregate variables into changes
in product-level variables, which ultimately drive incentives to push
the technological frontier in the vertical dimension. We show that the
potential for exponential growth due to an externality that makes entry
costs fall linearly with the number of products, combined with the
limited carrying capacity of the system due to fixed operating costs,
yields logistic dynamics for the number of products. This desirable
property allows us to provide a closed-form solution for the model's
transition path and thereby derive analytically the welfare effects of
changes in parameters and policy variables. Our Manhattan Metaphor
illustrates conceptually why we obtain this mathematical representation
when we simply add fixed operating costs to the standard modeling of
variety expansion.

*Journal of Economic Theory* (2007), 137, 353-382.

I
take a new look at the long-run
implications of taxation through the lens of modern Schumpeterian
growth
theory. I focus on the latest vintage of models that sterilize the
scale effect
through a process of product proliferation that fragments the aggregate
market
into submarkets whose size does not increase with the size of the
workforce. I
show that the following interventions raise welfare: (a) Granting full
expensibility of R&D to incorporated firms; (b) Eliminating the
corporate
income tax and/or the capital gains tax; (c) Reducing taxes on labor
and/or
consumption. What makes these results remarkable is that in all three
cases the
endogenous increase in the tax on dividends necessary to balance the
budget has
a positive effect on growth. A general implication of my analysis is
that
corporate taxation plays a special role in Schumpeterian economies and
provides
novel insights on how to design welfare-enhancing tax reforms.

This paper studies the effects of effluent taxes on firms' allocation of resources to cost-reducing and emission-reducing R&D, and on entrepreneurs' decisions to develop new goods and enter the market. A tax set at an exogenous rate that does not depend on the state of technology reduces growth, the level of consumption of each good, and raises the number of firms. The induced increase in the variety of goods is a benefit not considered in previous analyses. In terms of environmental benefits, the tax induces a positive rate of pollution abatement that offsets the "dirty" side of economic growth. A tax set at an endogenous rate that holds constant the tax burden per unit of output, in contrast, has ambiguous effects on growth, the scale of activity of each firm and the number of firms. Besides being novel, the potential positive growth effect of this type of effluent tax is precisely what makes this instrument effective for welfare-maximizing purposes. The socially optimal policy, in fact, requires the tax burden per unit of output to equal the marginal rate of substitution between the growth rate of consumption and abatement. Moreover, a tax/subsidy on entry is needed, depending on whether the contribution of product variety to pollution dominates consumers' love of variety.

The latest version of Schumpeterian growth theory eliminates the scale effect by positing a process of development of new product lines that fragments the aggregate market in submarkets whose size does not increase with population. A key feature of this process is the sterilization of the effect of the size of the aggregate market on firms' incentives to invest in the growth of a given product line. In this paper I apply this insight to shed new light on the workings of fiscal policy. I analyze the role of distortionary taxes on consumption, household labor and assets income, corporate income, and public spending. The framework allows me to show which of these fiscal variables have permanent (steady-state) growth effects, and which ones have only transitory effects. It also allows me to solve the transitional dynamics analytically, and thus to analyze in detail the welfare effects of tax rates and public spending, and investigate the effects of revenue-neutral changes in tax structure. Pair wise comparisons reveal that replacing taxes that distort labor supply with taxes that distort saving/investment choices raises welfare. I discuss the intuition behind this surprising finding.

*Journal of Economic
Growth* (2006), 11, 263-288.

Modern
Schumpeterian growth theory
focuses on the product line as the main locus of innovation and
exploits
endogenous product proliferation to sterilize the scale effect. The
empirical
core of the theory consists of two claims: (i) growth depends on
average
employment (i.e., employment per product line); (ii) average employment
is
scale-invariant. We show that data on employment, R&D
personnel, and the
number of establishments in the

**Market
Power, Unemployment, and Growth**,
in *Frontiers of Economic Growth and Development*, edited by Kwan Choi and Olivier de La Grandville, forthcoming
in the series Frontiers of Economics and Globalization (Emerald).

I present a model where firms and workers set wages above the market-clearing level. Unemployment is thus generated by their exercise of market power. Because both the labor and product markets are imperfectly competitive, market power in the labor market interacts with market power in the product market. This interaction sheds new light on the effects of policy interventions on unemployment and growth. For example, labor market reforms that reduce labor costs reduce unemployment and boost growth because they expand the scale of the economy and generate more competition in the product market.

**Econ 882M-01&02: Topics Macro/International Finance: Economic Growth (Graduate)**

**Econ 602-01: Macroeconomic
Theory (Graduate)**

**Econ 352/552: Economic
Growth (Undergraduate)**