Big Push in Distorted Economies

Why don’t poor countries adopt more productive technologies? Is there a role for policies that coordinate technology adoption? To answer these questions, we develop a model that features complementarity in firms’ technology adoption decisions: The gains from adoption goes up when more firms adopt. When this complementarity prevails, multiple equilibria and hence coordination failures are possible. However, even without equilibrium multiplicity, the model elements that cause the complementarity can substantially amplify the negative impact of distortions. Our quantitative analysis calibrated to the establishment size distributions in the US and India successfully generates the gap in income per capita between the two countries, because of the larger adoption costs and distortions in India, not coordination failures even though India is in the region of multiplicity. Furthermore, the negative impact of idiosyncratic distortions on aggregate productivity can be highly non-linear. Over an intermediate range of distortions, a small reduction in distortions can disproportionately increase the number of adopters and hence aggregate productivity, with or without equilibrium multiplicity. This is what we call the big push in distorted economies. ∗Buera: fjbuera@wustl.edu. Hopenhayn: hopen@econ.ucla.edu. Shin: yshin@wustl.edu. Trachter: trachter@gmail.com. We thank Andy Atkeson, Ariel Burstein, Ezra Oberfield, and participants at several seminars and conferences for their feedback. We thank Eric LaRose, Reiko Laski and James Lee for outstanding research assistance. The views expressed herein are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of Richmond or the Federal Reserve System.