TDPE presents: Mike Waugh

 Specialization, Economic Development and Aggregate Productivity Differences Authors: David Lagakos & Michael E. Waugh Cross-country labor productivity differences are large in agriculture and much smaller in nonagriculture. We argue that these relative productivity differences arise when subsistence consumption needs prevent workers in poor countries from specializing in the sector in which they are most productive. We formalize our theory by embedding the Roy (1951) model of ability into a two-sector general-equilibrium growth model in which the agents’ preferences feature a subsistence food requirement. A parameterized version of the model predicts that output per worker gaps will be substantially larger across countries in agriculture than non-agriculture even though countries differ only by a sector-neutral efficiency term. Mike Waugh is Assistant Professor of Economics at NYU’s Stern School of Business. His recent work has been published in the American Economic Review.