Inclusion of Firm Heterogeneity in Resource Boom-Bust Cycle Literature

Abstract

This chapter combines the resource curse and firm heterogeneity to estimate how a resource boom will affect non-resource-intensive productivity. The cost of production for the non-resource sector is high due to expensive domestic currency, volatile commodity prices, and rent-seeking activities. The economic diversification leads to long-term growth by generating spill-over effects and increasing returns of scale, but effective economic diversification demands a greater understanding of how a group of firms behave during a resource boom. While low-productivity firms can improve their productivity with low-cost options, highly productive firms actually experience a decline in productivity due to the high cost of shifting to other opportunities, so the net effect is a stagnation of aggregate productivity that is consistent with the resource curse hypothesis.