Was Prometheus Unbound by Chance? Risk, Diversification, and Growth

  title={Was Prometheus Unbound by Chance? Risk, Diversification, and Growth},
  author={Daron Acemoglu and Fabrizio Zilibotti},
  journal={Journal of Political Economy},
  pages={709 - 751}
This paper offers a theory of development that links the degree of market incompleteness to capital accumulation and growth. At early stages of development, the presence projects limits the degree of risk spreading (diversification) that the economy can achieve. The desire to avoid highly risky investments slows down capital accumulation, and the inability to diversify idiosyncratic risk introduces a large amount of uncertainty in the growth process. The typical development pattern will consist… 

Technological Diversi fi cation ∗

Economies at early stages of development are often shaken by abrupt changes in growth rates, whereas in advanced economies growth rates tend to be relatively stable. To explain this pattern, we

Idiosyncratic Production Risk, Growth, and the Business Cycle

We introduce a neoclassical growth economy with idiosyncratic production risk and incomplete markets. Each agent is an entrepreneur operating her own technology with her own capital stock. The

Idiosyncratic Investment Risk in a Neoclassical Growth Economy

This paper examines the effects of idiosyncratic investment, entrepreneurial, or capital-income risk in a neoclassical growth economy, with heterogeneous infinitely-lived risk-averse households,

Rethinking the Effects of Financial Liberalization

During the last few decades, many emerging markets have lifted restrictions on cross-border financial transactions. The conventional view was that this would allow these countries to: (i) receive

Does Idiosyncratic Business Risk Matter?

Financial market imperfections can prevent entrepreneurs from diversifying away the idiosyncratic risk of their business. As a result idiosyncratic risk discourages entrepreneurial activity and

Sectoral Expansion, Allocation of Talent, and Financial Development

This paper presents a theory in which economic development manifests itself pri- marily as a process of sectoral dierentiation. As the variety of sectors expands, the allocation of heterogeneously

The Luck of the Development Draw: Environmental Volatility and the Takeoff to Modern Economic Growth

This paper tests the implications of the model developed by Acemoglu and Zilibotti [Daron Acemoglu and Fabrizio Zilibotti, 1997. Was Prometheus unbound by chance? Risk, diversification and growth.

Liquidity, Financial Intermediation and Growth ∗

How do the liquidity functions of banks affect investment and growth at different stages of economic development? How do financial fragility and the costs of banking crises evolve with the level of

Relating Output and Volatility in a Model of International Risk-Sharing with Limited Commitment

I study the constrained efficient allocations of a simple model of risk sharing and capital flows across countries assuming that each country cannot commit to fully repay its contract obligations. In



Finance and Growth: Schumpeter Might Be Right

Joseph Schumpeter argued in 1911 that the services provided by financial intermediaries - mobilizing savings, evaluating projects, managing risk, monitoring managers, and facilitating transactions

Technological Choice, Financial Markets and Economic Development

Financial Development, Growth, and the Distribution of Income

A paradigm is presented in which both the extent of financial intermediation and the rate of economic growth are endogenously determined. Financial intermediation promotes growth because it allows a

Intermediation with Costly Bilateral Exchange

This paper was motivated in part by questions of optimal regulation of financial institutions such as intermediaries. It is believed that an analysis of such questions should take place in a model in

Financial Intermediation and Endogenous Growth

An endogenous growth model with multiple assets is developed. Agents who face random future liquidity needs accumulate capital and a liquid, but unproductive asset. The effects of introducing

Empirical cross-section dynamics in economic growth

Arbitrage, Short Sales, and Financial Innovation

The authors describe a model of general equilibrium with incomplete markets in which firms can innovate by issuing arbitrary, costly securities. When short sales are prohibited, firms behave

Endogenous growth and intermediation in an 'archipelago' economy

A general equilibrium model based on the parable of an economy of many islands shows the market imperfections in the intermediation activity affect economic growth and possibly prevent take off into

Finance and development: issues and experience: List of figures

1. Introduction Alberto Giovannini Part I. The Role of Finance in Economic Development: 2. International finance and economic development Paul Krugman 3. A theory of financial development Oren