Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure

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Empirics for Economic Growth and Convergence by Danny T. Quah LSE Economics Department and CEP CENTRE FOR ECONOMIC PERFORMANCE DISCUSSION PAPER NO. 253 July 1995 This paper is produced as part of the Centre's Programme on National Economic Performance.

important in re-shaping this article. X. Sala-i-Martin has generously donated insight and time to try and make me understand. He need not, however, agree with all my statements below. All calculations were performed using the econometrics shell tsrf.

 Comments by J. Dolado, F. Giavazzi, and an anonymous referee have been

Nontechnical Summary The convergence hypothesis|that poor economies might \catch up"| has generated a huge empirical literature: this paper critically reviews some of the earlier key ndings, clari es their implications, and relates them to more recent results. Particular attention is devoted to interpreting convergence empirics. The paper argues that relating them to growth theories, as usually done, gives but one interpretation to convergence dynamics; it does not exhaust their importance. Instead, if we relate convergence to the dynamics of income distributions, it broadens the issues on which such empirics can shed light; it connects with policy concerns on persistent or growing inequality, regional core-periphery stagnation, and tendencies for ongoing capital ows across developed and developing countries. The main ndings are: (1) The much-heralded uniform 2% rate of convergence could arise for reasons unrelated to the dynamics of economic growth. (2) Usual empirical analyses|cross-section (conditional) convergence regressions, time series modelling, panel data analysis|can be misleading for understanding convergence; a model of polarization in economic growth clari es those diculties. (3) The data, more revealingly modelled, show persistence and immobility across countries: some evidence supports Baumol's idea of \convergence clubs"; some evidence shows the poor getting poorer, and the rich richer, with the middle class vanishing. (4) Convergence, unambiguous up to sampling error, is observed across US states.

Empirics for Economic Growth and Convergence by Danny T. Quah LSE Economics Department and CEP November 1995 ABSTRACT The convergence hypothesis has generated a huge empirical literature: this paper critically reviews some of the earlier key ndings, clari es their implications, and relates them to more recent results. Particular attention is devoted to interpreting convergence empirics. The main ndings are: (1) The much-heralded uniform 2% rate of convergence could arise for reasons unrelated to the dynamics of economic growth. (2) Usual empirical analyses|cross-section (conditional) convergence regressions, time series modelling, panel data analysis|can be misleading for understanding convergence; a model of polarization in economic growth clari es those diculties. (3) The data, more revealingly modelled, show persistence and immobility across countries: some evidence supports Baumol's idea of \convergence clubs"; some evidence shows the poor getting poorer, and the rich richer, with the middle class vanishing. (4) Convergence, unambiguous up to sampling error, is observed across US states.

Keywords: evolving distributions, Galton's fallacy, polarization, regional dynamics, stochastic kernel, unit root

JEL Classi cation: C21, C22, C23, O41 Communications to: D. T. Quah, LSE, Houghton Street, London WC2A 2AE. [Tel: +44-171-955-7535, Fax: +44-171-831-1840, Email:
dquah(lse.ac.uk]

1. Introduction

It res the imagination that policy might be able to in
uence economic growth, thereby allowing poor economies [countries, regions, states, provinces, districts, cities, : : : ] either to catch up with those already richer, or to languish, depending. This intellectual excitement is reminiscent of how macroeconomists used to view their ability to stabilize business cycles. Standard neoclassical models assumed growth to be...
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