Vested Interests in a Positive Theory of Stagnation and Growth

Per Krusell, José V́ictor Ríos-Rull

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Abstract

We study a positive theory of stagnation and growth aimed at understanding the large variations in growth outcomes across actual economies. The theory points to the fundamental role played by vested interests in determining policies which are key to the growth process: some agents seek to prevent the adoption of new technologies. We develop a model of technology adoption, and show how technological innovation may sow the seeds of its own destruction. In particular, we find that the equilibrium is characterized by a long cycle of stagnation and growth. Over this cycle, incumbent innovators have sufficient political influence that new technologies are prohibited, and only as these incumbents are phased out of the economy will new innovation occur. In formalizing our theory we make a methodological contribution by characterizing dynamic voting equilibria in which voters must forecast the effects of different current policies on future prices and policy outcomes.

Original languageEnglish (US)
Pages (from-to)301-329
Number of pages29
JournalReview of Economic Studies
Volume63
Issue number2
DOIs
StatePublished - 1996

Bibliographical note

Funding Information:
Acknowledgements. We are grateful for comments from Carl Heiberg and from participants at the European Science Foundation conference on Politics and Economic Policy in Lisbon, the NBER Summer Institute, the Federal Reserve Bank of Minneapolis Economics & Politics Conference, and the O.F.C.E.-E.N.S. conference on Growth and Income Distribution in Paris, as well as workshop participants at Carnegie-Mellon, Chicago, Michigan, Northwestern, Pennsylvania, Queen's, Rochester, the Simon School of Business, Western Ontario, York and the Institute for International Economic Studies. The first author gratefully acknowledges partial financial support from The Bank of Sweden Tercentenary Foundation and from the National Science Foundation. The work by the second author was partially supported by the National Science Foundation. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

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