4060 Ann Harrison and Andrés Rodríguez-Clare

(e converts raw labor units L into efficiency units H) with productivities as in Eaton and
Kortum (2002): one unit of H produces z units of manufactures, with z for each good
j e [0, 1] drawn from the Fréchet distribution with parameters T and f, as above.
Assuming no transportation costs for either agriculture or manufacturing, and letting agri-
culture serve as numeraire, then the wage is w ¼ lF 0 (LA). The cost of producing
a manufacturing good with productivity draw z is w/ez, and, analogous to the expres-
sion in Eq. (9), the share of manufactures that will be exported by a country with
wage w, labor efficiency e, and technology parameter T, is

ðw=eÞ$fT
X
ðw l =el Þ$fT l

Consider now two countries that differ only in l, e, or T. The country with higher l
will exhibit a higher wage, but will also devote more resources to agriculture and less to
manufacturing, with a smaller share of manufacturing goods exported and a lower level
of diversification (i.e., the number of goods exported is lower). This is a case of “good
concentration.” On the other hand, a country with a lower e or a lower T would also
have a higher share of labor in agriculture, with higher concentration, but in this case
the equilibrium wage would be lower. This is a case of “bad concentration.”
Now let us think about the determinants of T. In a dynamic setting, T can be seen as
the stock of ideas (see Eaton & Kortum, 2001). Imagine that there is a worldwide stock of
ideas, T % , that grows at rate n. Discovery can be seen as the process by which a country
adopts these worldwide ideas to the national environment. This is not exactly as in
Hausmann and Rodrik (2003), where productivity is determined ex ante, and experi-
mentation simply reveals what that productivity is. But the basic implications are the
same. If x is the rate of discovery, then T_ ¼ xT %, and in steady state T/T % ¼ x/n. Thus,
a higher rate of discovery leads to diversification and a higher equilibrium wage.25
The rate of discovery depends on its cost and associated private returns. If there are
knowledge spillovers, as in Hausmann and Rodrik (2003), so that once an entrepreneur
adopts a foreign idea then it diffuses rapidly to others in the economy, then the market
by itself would lead to a suboptimal level of discovery and a level of diversification that
would be too low. Polices to encourage discovery would lead to more diversification
and higher welfare.
2.5 National and global gains from IP
The gains from IP for a country could come at the expense of other countries, or they
could lead to global efficiency gains. We now explore the nature of the gains from IP
for the different models discussed above.
Consider first the case in which the existence of Marshallian externalities leads to
multiple equilibria. Above we considered a small country, but to explore whether gains