Industrialization and the Big Push, Issue 2708
National Bureau of Economic Research, 1988 - Industrialization - 32 pages
This paper explores Rosenstein-Rodman's (1943) idea that simultaneous industrialization of many sectors of the economy can be profitable for all of them, even when no sector can break even industrializing alone. We analyze this ides in the context of an imperfectly competitive economy with aggregate demand spillovers, and interpret the big push into industrialization as a move from a bad to a good equilibrium. We show that for two equilibria to exist, it must be the case that an industrializing firm raises the demand for products of other sectors through channels other than the contribution of its own profits to demand. For example, a firm paying high factory wages raises demand in other manufacturing sectors even if it loses money. In a similar vein, a firm investing today in order to produce at low cost tomorrow shifts income and hence demand for other goods into the future and so makes it more attractive for other firms also to invest today. Finally, an investing firm can benefit firms in other sectors if it uses a railroad or other shared infrastructure, and hence helps to defray the fixed cost of building the railroad. All these transmission mechanisms that help generate the big push seem to be of some relevance for less developed countries
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1-firms aggregate demand aggregate income Andrei Shleifer assume big push Bureau of Economic Business Cycle cash flow competitive fringe constant returns consumer surplus consumption coordinated investment cottage production demand accounts demand curve demand for manufactures discount factor domestic demand domestic industrial output domestic market Economic Research economy industrialize effect efficient Elhanan Helpman equilibrium with industrialization Exchange Rate F units factory wages firm raises firm to invest firm's profit firms invest fixed cost firms growth hence imperfect competition increasing returns technologies incurs the fixed industrial firms industrialization equilibrium industrializing sectors infrastructure intertemporal investing firm investment decision last firm level of industrialization Massachusetts Avenue monopolist multiple equilibria National Bureau NBER numeraire paper pecuniary externalities price discriminate railroad is built raises the demand result returns to scale Robert Vishny Rosenstein-Rodan second equilibrium sectors industrialize simultaneous industrialization surplus underinvest unindustrialized unit of labor unit of output unprofitable investment users wage premium workers