Limited Absorptive Capacities and the Emergence of Convergence Clubs

We develop a simple and tractable model of productivity growth and technology spillovers that can explain the emergence of real world empirical productivity distributions. We assume that the outcomes of firms’ in-house R&D efforts are governed by a stochastic growth process that depends on the current technology level of the firm. Moreover, firms can imitate other firms’ technologies subject to their absorptive capacities. We show that the combined process of in-house innovation and imitation gives rise to balanced growth with persistent productivity differences even when starting from ex ante identical firms. We show that along the balanced growth path the emerging productivity distribution can be described as a traveling wave. Further, we take into account that firms are boundedly rational and can only imperfectly predict the outcomes of their innovation and imitation strategies. We show that this limited rationality can enhance industry performance and efficiency. Acknowledgement: I would like to thank Fabrizio Zilibotti for supervision and comprehensive support, and Jan Lorenz for assistance and collaboration in the development of the theory and its numerical analysis.