1. Chapter 5 Slide 1 Copyright © 2003 Pearson Education, Inc. Flavors of Growth Theories n Neoclassical growth: –diminishing returns to capital  convergence –Exogenous technology  progress Solow growth residual n Endogenous growth: –Increasing returns to capital Setback  permanent income gap –Complementary investments Human capital/infrastructure/R&D  public role

2. Chapter 5 Slide 2 Copyright © 2003 Pearson Education, Inc. New Growth Theory: Endogenous Growth n The Romer model: the knowledge embedded in K is a public good (5.1) (5.2) (5.3)

3. Chapter 5 Slide 3 Copyright © 2003 Pearson Education, Inc. Coordination Failure and Multiple Equilibria: Chicken – Egg Problems/One – Time Fix

4. Chapter 5 Slide 4 Copyright © 2003 Pearson Education, Inc. Coordination failures: some simple examples n Malthusian population trap: need child’s labor to survive n Network economies n Training workers/getting trained n Threshold mkt for middleman  cash crops n Timing investment: wait and see n Initializing industrialization – who will buy? –Rosenstein-Rodan – Murphy, Shleifer, Vishny

5. Chapter 5 Slide 5 Copyright © 2003 Pearson Education, Inc. Intervention: The Big Push  Generate Sufficient Income to Modernize Wage W 2  Multiple Equilibria (all modern, all traditional)

6. Chapter 5 Slide 6 Copyright © 2003 Pearson Education, Inc. Need for BIG PUSH n Create sufficiently large market n Fixed costs reduce income and demand initially  insufficient demand n Agglomeration (urbanization) & industrialization n Infrastructure effects n Training effects

7. Chapter 5 Slide 7 Copyright © 2003 Pearson Education, Inc. Need for Big Push: Why no super-entrepreneur? n Capital market failures: Whom to trust? n Management: Principal – Agent Problem n Coordination of investment n Limited expertise: stick-to-knitting

8. Chapter 5 Slide 8 Copyright © 2003 Pearson Education, Inc. Further Problems of Multiple Equilibria n Inefficient advantages of incumbency n Behavior and norms n Linkages n Inequality, multiple equilibria, and growth