Chad Jones | Recipes and Economic Growth: A Combinatorial March Down an Exponential Tail

Stanford Graduate School of Business Professor joined us on Monday, April 3, 2023, for his talk, "Recipes and Economic Growth: A Combinatorial March Down an Exponential Tail."
Abstract
New ideas are often combinations of existing ideas, a point emphasized by Romer (1993) and Weitzman (1998). But this insight is largely absent from state-of-the-art models. Separately, Kortum (1997) created a new framework for modeling growth, one where ideas are draws from a probability distribution, and argued that the Pareto distribution plays an essential role. What happened to the Romer-Weitzman observation that combinations matter, and do we really need to make such a strong distributional assumption to get growth? This paper shows that combinatorial increases in the number of draws from standard thin-tailed distributions leads to exponential economic growth. More broadly, the paper provides a theorem linking the behavior of the max extreme value to the number of draws and the shape of the upper tail for probability distributions.