Comparing TFP Catching-up and Capital Deepening in US and European Growths: A Directional Distance Function Approach

Jean-Philippe Boussemart and Hervé Leleu

No 2008-ECO-01, Working Papers from IESEG School of Management

Abstract: In Solow’s model the income convergence between countries arises from two main sources: a capital deepening effect resulting from the diminishing returns of the production technology and a technological transfer/diffusion effect related to Total Factor Productivity (TFP) differences. A large literature has been devoted to analyze these effects but most of the studies suffer from three weaknesses by defining the US as the a priori technological leader, by using a parametric functional form and by assuming constant returns to scale for the technology. Our paper offers an alternative approach based on a non-parametric programming framework and the estimation of directional distance functions. We explicitly separate country TFP differences into two components: a technology effect and a scale effect to study the catching-up process on each of them. We also analyze the role of the capital deepening effect by introducing a relevant measure of the structural efficiency which reveals inefficiencies due to changes in input-ratio differences. Our empirical work focuses on 15 European countries (EU) and the US over the period 1980-2004. We use time series procedures to test for convergence for individual countries or sub-sets of countries.

Keywords: TFP Catching-up; Capital Deepening; Convergence; Directional Distance Function. Running title: Comparing TFP Catching-up and Capital Deepening (search for similar items in EconPapers)
JEL-codes: D24 O33 O47 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2008-01
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