Sources of TFP Growth – Occupational Choice and Financial Deepening

Hyeok Jeong and Robert M. Townsend. Economic Theory, 2007, 32(1), pp. 179-221.

In this in-depth look at theories of wealth creation, the authors develop a method of growth accounting based on the integrated use of transitional growth models and micro data to explain the sources of total factor productivity (TFP) growth. TFP growth is measured as a residual, so the authors seek to identify the underlying sources of this residual growth by decomposing growth into four components: occupational shifts, financial deepening, capital heterogeneity and sectoral Solow residuals.  When the growth accounting method is utilized in Thailand, a country that experienced rapid growth and great structural changes between 1976 and 1996, it is found that the majority of TFP growth can be explained by occupational shifts and financial deepening. Additionally, expansion of credit is found to be a major part. LINK