The Ambrosini Critique
Sharpening my knife
(mouse over the images)
Thanks for taking the time to put these together. This, plus your latest reply in the other entry make it pretty clear.
I do remember that TFP was strictly nonincreasing in the barriers parameter (whose interpretation depends on the microfoundations, but it doesn’t matter now).
I’ll take some time this weekend to work out the algebra and I’ll try to get an explicit expression for TFP.
It took me about 5 minutes to put these together so no worries. I just think visually sometimes and when that happens its hard for me to articulate myself in words.
Anyway, which parameter in the P&P model are you calling the barriers parameter?
NOW I understand! You’re unsatisfied with the fact that in the model they work out they use
Pi_0 < Pi_1 < Pi_2
And Pi_1 is used in equilibrium… But you could easily have an economy with … < Pi_i-1 < Pi_i < Pi_i+1 < …
It’s enough that, whatever the set of technologies, the TFP different can be as big as 3, and it can.
The other example shows this clearer, the one where there’s overstaffing.
I’ll work a post in the w/e.
P.S. Just to be clear about what I read there… P&P want to show that several micro phenomena, related to political power supporting industry insiders, lead to an aggregate production function of the form:
Y = A(theta) K^alpha L^(1-alpha)
with d A(theta)/d theta < 0 for all theta.
I think they pick an example with only 3 possible values of A(.), the 3 Pi-s, for analytical convenience only. But I do agree it can be confusing.
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