Comparative advantage, complexity, and volatility

Less developed countries tend to experience higher output volatility, a fact that is in part explained by their specialization in more volatile sectors. This paper proposes theoretical explanations for this pattern of specialization – with the complexity of the goods playing a central role. Specifically, less developed countries with lower institutional ability to enforce contracts, or alternately, with low levels of human capital will specialize in less complex goods which are also characterized by higher levels of output volatility. We provide novel empirical evidence that less complex industries are indeed more volatile.