Business Intelligence

Aggregation Versus Heterogeneity In Cross-Country Growth Empirics

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Executive Summary

The cross-country growth literature commonly uses aggregate economy datasets such as the Penn World Table (PWT) to estimate homogeneous production function or convergence regression models. Against the background of a dual economy framework this paper investigates the potential bias arising when aggregate economy data instead of sectoral data is adopted in macro production function regressions. Using a unique World Bank dataset the authors estimate production functions in agriculture and manufacturing for a panel of 41 developing and developed countries (1963-1992). They employ novel empirical methods which can accommodate technology heterogeneity, variable non-stationarity and the breakdown of the standard cross section independence assumption.

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