Endogenous TFP and Cross-Country Income Differences

This paper explores the quantitative implications of a class of endogenous growth models for cross-country income differences. These models exhibit international spillovers, no scale effects and conditional convergence, and thus they overcome some difficulties faced by the early generation of endogenous growth models. Cross-country income differences arise in the model as the result of different distortions in the accumulation of rival factors of production, the objects, and in the accumulation of nonrival factor of production, the ideas. We show that object gaps play a much larger role to explain income gaps in models with endogenous TFP than in models with exogenous TFP. We also show, using a carefully calibrated version of the model, that most of the cross-country differences in output per worker are explained by barriers to the accumulation of rival factors (physical and human capital) rather than by barriers to the accumulation of knowledge.