| Modern economic growth owes its origin to the knowledge economy---an economy where individuals get together to create new knowledge and then pass on that knowledge to others. Understanding how knowledge is created and how it diffuses through the masses is essential for understanding not only growth, but also diverse phenomena like globalization, structural transformation and urbanization. In the following three chapters, I put the knowledge economy in the forefront as I try to explore issues like the effect of globalization on the welfare of individuals, or, the effect of a change in inequality on growth.;In Chapter 1, I develop a dynamic, general equilibrium model to understand how multinationals affect host countries through knowledge diffusion. Workers in my model, learn from their managers and knowledge diffusion takes place through worker mobility. In contrast to the standard Heckscher-Ohlin model, I present a novel mechanism, through which a Pareto improvement occurs following integration, in the presence of learning dynamics. I study how integration affects the life time earnings of agents and the degree of inequality in the host country, as well as, analyze the pattern of multinational activity.;In Chapter 2, I develop a two sector growth model to understand the relation between inequality and growth. Agents, who are endowed with different levels of knowledge, select either into a retail or a manufacturing sector. Agents in the manufacturing sector match to carry out production. A by-product of production is creation of ideas that spill over to the retail sector and improve productivity, thereby causing growth. I study how an increase in the inequality of the knowledge distribution affects the growth rate. In particular, I find conditions under which an increase in inequality raises the growth rate of the economy.;Evidence points to the existence of a "missing middle" in the size distribution of firms in developing countries. In Chapter 3, I develop a dynamic model to understand the evolution of the firm size distribution in developing countries. Unlike existing explanations, my model does not rely on frictions to generate the bi-modality in size distribution. Rather, the bi-modality arises due to heterogeneous agents optimally selecting into a traditional and a modern sector. As aggregate knowledge in the economy rises, the size distribution converges from a bi-modal to an uni-modal distribution, consistent with evidence. |
