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Sources of TFP growth: occupational choice and financial deepening

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This paper explains and measures the sources of total factor productivity (TFP) by developing a method of growth accounting based on an integrated use of transitional growth models and micro data. We decompose TFP growth into the occupational-shift effect, financial-deepening effect, capital-heterogeneity effect, and sectoral-Solow-residuals. Applying this method to Thailand, which experienced rapid growth with enormous structural changes between 1976 and 1996, we find that 73% of TFP growth is explained by occupational shifts and financial deepening, without presuming exogenous technical progress. Expansion of credit is a major part. We also show the role of endogenous interaction between factor price dynamics and the wealth distribution for TFP.

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Correspondence to Robert M. Townsend.

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The first drafts of the paper were circulated around December 2003 under the title of “A Cautionary Tale of Total Factor Productivity Analysis: Decomposition of the Residual”.

We thank Richard Rogerson for his clarifying and helpful discussion. The comments from the participants of the Minnesota Workshop in Macroeconomic Theory 2004, Stanford Institute for Theoretical Economics (SITE) Summer Workshop 2004, European Meeting and North American Summer Meeting of the Econometric Society 2004, NEUDC 2004, Iowa Conference of Economic Development, and seminars at USC Marshall School, Penn State University, UCLA, and UCSD are also appreciated. Financial support from NSF (SES-0318340) and NICHD (R01 HD27638) is gratefully acknowledged.

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Jeong, H., Townsend, R.M. Sources of TFP growth: occupational choice and financial deepening. Economic Theory 32, 179–221 (2007).

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