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Was Prometheus unbound by chance? Risk, diversification and growth

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  • Daron Acemoglu
  • Fabrizio Zilibotti
Abstract
This paper offers a theory of development that links the degree of market incompleteness to capital accumulation and growth. Because sectoral indivisibilities limit the extent of diversification, poor economies suffer higher volatility of growth and endogenously lower productivity. As the economy develops, agents hold more balanced portfolios and can take better advantage of high-return production opportunities. Although all agents are price takers and there are no technological spillovers, the decentralized equilibrium is inefficient because individuals do not internalize the impact of their investment decisions on others' diversification opportunities. The results generalize to economies with international capital flows. Copyright 1997 by the University of Chicago.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Daron Acemoglu & Fabrizio Zilibotti, 1994. "Was Prometheus unbound by chance? Risk, diversification and growth," Economics Working Papers 98, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:98
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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