Technical Progress and Allocative Inefficiency

Li Anpeng is a fourth year PhD candidate in the Australian National University. His research interest is firm dynamics and productivity in emerging economies. He is particularly interested in Chinese issues.

I develop a growth model with heterogeneous firms to study the allocative inefficiency in emerging economies. The model economy learns new technology from the world frontier, and reallocates resources to fit the technological change. When a firm starts to catch up the frontier, it faces the uncertainty of future technical progress, and delays the adjustment of production factors as a response. The delayed adjustment generates allocative inefficiency in the early stage of development. Then, technological achievement narrows the gap to the frontier, reduces the future uncertainty, and improves the efficiency. Finally, the economy reaches an more efficient distribution again in the new steady state. The model suggests that the cross-country difference in allocative efficiency can be a byproduct of the different stages of development.