Compositional Growth Models

Abstract:

Compositional models are increasingly used for the microfoundation of economic growth models. This approach has gained empirical support with the growing availability of detailed microdata. In these models, aggregate entities are decomposed into units that grow almost independently of each other, such as a firm’s sales across different markets or products. The growth rate of the aggregate entities is therefore the sum of the growth rates of a changing set of individual units, weighted according to their importance. We offer a comprehensive overview of compositional models and demonstrate how they can be interpreted within a unified theoretical framework based on Gaussian scale mixtures. Finally, we explore their practical applications and outline promising directions for future research.