Contemporary Models of Development and Underdevelopment Chapter 5

New Growth Theory: Endogenous Growth Motivation for the new growth theory The Romer model (5.1) (5.2) (5.3)

New Growth Theory: Endogenous Growth Motivation for the new growth theory The Romer model Criticisms of the new growth theory

Underdevelopment as a Coordination Failure Coordination failures occur when agents’ inability to coordinate their actions leads to an outcome that makes all agents worse off We’ll consider ‘big push’ models the ‘O-ring’ model

Multiple Equilibria: A Diagrammatic Approach Generally, these models can be diagrammed by graphing an S-shaped function and the 45º line Equilibria are stable when the function crosses the 45º line from above unstable when the function crosses the 45º line from below

Figure 5.1 Multiple Equilibria

Starting Economic Development: The Big Push Sometimes market failures lead to a need for public policy intervention The big push: a graphical model assumptions

Figure 5.2 The Big Push

Starting Economic Development: The Big Push Sometimes market failures lead to a need for public policy intervention The big push: a graphical model assumptions conditions for multiple eqilibria other cases in which a big push may be necessary Why can’t the problem be solved by a ‘super-entrepreneur’?

Further Problems of Multiple Equilibria Inefficient advantages of incumbency Behavior and norms Linkages Inequality, multiple equilibria, and growth

Kremer’s O-Ring Theory of Economic Development The O-ring model

Figure 5.3 The O-Ring Production Function: Wage as a Function of Human Capital Quality

Kremer’s O-Ring Theory of Economic Development The O-ring model Implications of the O-ring theory

Concepts for Review Agency costs Agent Aid failure Asymmetric information Big push Complementarities Complementary investments Congestion Coordination failure Deep intervention Endogenous growth theory Linkage Multiple equilibria New growth theory O-ring model

Concepts for Review, cont’d O-ring production function Pareto improvement Pecuniary externalities Poverty trap Prisoners’ dilemma Public good Romer’s endogenous growth model Solow residual Technological externalities Underdevelopment trap Where-to-meet dilemma