THE ECONOMICS OF GROWTH

Philippe Aghion and Peter Howitt

with the collaboration of Leonardo Bursztyn

The MIT Press Cambridge, Massachusetts London, England

© 2009 Massachusetts Institute of Technology All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher. For information about special quantity discounts, please email [email protected] This book was set in Times Roman by SNP Best-set Typesetter Ltd., Hong Kong. Printed and bound in the United States of America. Library of Congress Cataloging-in-Publication Data Aghion, Philippe. The economics of growth / Philippe Aghion and Peter W. Howitt. p. cm. Includes bibliographical references and index. ISBN 978-0-262-01263-8 (hardcover : alk. paper) 1. Economic development. I. Howitt, Peter. II. Title. HD82.A5452 2009 338.9—dc22 2008029818 10 9 8 7 6 5 4 3 2 1

Acknowledgments

We are primarily indebted to all the students and colleagues on whom we tested the material of this book until we felt we had achieved our goal of making it broadly accessible. Our students at Brown and Harvard, especially Quamrul Ashraf, Leonardo Bursztyn, Filipe Campante, Alberto Cavallo, Azam Chaudhry, Quo-Hanh Do, Georgy Egorov, Jim Feyrer, Phil Garner, David Hemous, Michal Jerzmanowski, Takuma Kunieda, Kalina Manova, Daniel Mejia, Erik Meyersson, Stelios Michalopoulos, Petros Milionis, Malhar Nabar, Manabu Nose, Omer Ozak, and Isabel Tecu, have taught us at least as much as we have taught them. We are also grateful for feedback from those individuals who attended our lectures at University College London, the Stockholm School of Economics, the University of Zurich, the University of Bonn, the University of Munich, the University of Kiel, the Paris School of Economics, the New Economic School in Moscow, the Di Tella University in Buenos Aires, the CEPII in Paris, Javeriana University in Bogota, the 2001 NAKE Workshop at the Vrije Universiteit Amsterdam and the 2005 NAKE School at the University of Maastricht, Wuhan University, and the IMF Institute. Our simple reformulations of the main growth paradigms owe a lot to joint modeling efforts with Daron Acemoglu, Marios Angeletos, Philippe Bacchetta, Abhijit Banerjee, David Mayer-Foulkes, Gianluca Violante and Fabrizio Zilibotti. Our concern for matching growth theories with data and empirics grew out of a long-standing collaboration with our colleagues Richard Blundell and Rachel Griffith from the London Institute of Fiscal Studies, and also from joint work with Alberto Alesina, Yann Algan, Nick Bloom, Robin Burgess, Pierre Cahuc, Diego Comin, Gilbert Cette, Thibault Fally, Johannes Fedderke, Joonkyung Ha, Caroline Hoxby, Enisse Kharroubi, Kalina Manova, Ioana Marinescu, Costas Meghir, Susanne Prantl, Romain Ranciere, Steven Redding, Stefano Scarpetta, Andrei Shleifer, Francesco Trebbi, Jerome Vandenbussche, and John Van Reenen. We have benefited over the years from numerous discussions on various aspects of growth theory with our colleagues Pol Antras, Costas Azariadis, Robert Barro, Flora Bellone, Roland Benabou, Francesco Caselli, Guido Cozzi, Elias Dinopoulos, Esther Duflo, Steve Durlauf, Oded Galor, Gene Grossman, Elhanan Helpman, Wolfgang Keller, Tom Krebs, Chris Laincz, Ross Levine, Robert Lipsey, Greg Mankiw, Borghan Narajabad, Pietro Peretto, Thomas Piketty, Francesco Ricci, Paul Segerstrom, Andrei Shleifer, Enrico Spolaore, David Weil, Martin Weitzman, Jeff Williamson, Marios Zachariadis, and Luigi Zingales. Finally, our views on growth policy design have been greatly influenced over the past years by discussions and collaborations with Erik Berglof, Elie Cohen, Mathias Dewatripont,

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Acknowledgments

Steven Durlauf, William Easterly, Ricardo Hausmann, Martin Hellwig, Andreu Mas-Colell, Jean Pisani-Ferry, Ken Rogoff, Dani Rodrik, Andre Sapir, Nicholas Stern, and Federico Sturzenegger. We have greatly benefited from our association with the Institutions, Organization and Growth (IOG) Group at the Canadian Institute for Advanced Research. There, we particularly benefited from continuous feedback from Elhanan Helpman, George Akerlof, Tim Besley, Daniel Diermayer, James Fearon, Patrick Francois, Joel Mokyr, Roger Myerson, Torsten Persson, Joanne Roberts, Jim Robinson, Ken Shepsle, Guido Tabellini, and Dan Trefler. The encouragement and support of Daron Acemoglu, Kenneth Arrow, Robert Barro, Olivier Blanchard, Oliver Hart, Martin Hellwig, Edmund Phelps, Mark Schankerman, Robert Solow, Jean Tirole, and Fabrizio Zilibotti over the years have been invaluable to us. The book would never have been completed on time without the active collaboration of graduate students at Harvard. Here our biggest debt is to Leonardo Bursztyn, who worked with us on the literature reviews, provided the background notes for the econometric appendix, collaborated with us on the environment chapter, produced all the figures, proofread the material, and coordinated the team that produced the problem sets and solutions. In this endeavor, Leonardo worked with David Hemous, Dorothée Rouzet, Thomas Sampson, and Ruchir Agarwal. We owe special thanks to John Covell from MIT Press, who managed the tour de force of getting the book to be ready on time in spite of initial delays in delivering the manuscript, and provided us with all the support we needed along the way to completion. In particular, Nancy Lombardi did an outstanding job in supervising the copyediting of the manuscript and then handling the page proofs until the book was ready to print. Sarah Chaillet did us an immeasurable favor by offering one of her paintings for the book cover. Philippe Aghion is infinitely thankful to Benedicte Berner whose sense of humor, “joie de vivre,” and continuous faith in this project have been so essential for its completion. Peter Howitt’s biggest debt is to Pat Howitt for the loving support, lively spirit, and uncommonly good sense that contributed more than words can describe.