From Micro to Macro in an Equilibrium Diffusion Model

Abstract

We show how exogenous variation in individual-level interactions identifies critical diffusion parameters in a wide class of general equilibrium firm diffusion models. We implement our procedure in Kenya with a randomized controlled trial in which we shock firm learning opportunities. Embedding these results in a full general equilibrium model generates a quantitatively important diffusion externality. Micro treatment effects are crucial for estimating the diffusion parameters, but have no direct relationship with the quantitative importance of equilibrium diffusion. The results highlight the complex relationship between micro and macro effects when the externality operates primarily through the aggregate state of the economy. This work is part of the Private Enterprise Development in Low Income Countries (PEDL) programme