Copyright 2003 Pearson Education Inc Chapter 5 Slide

Contemporary Models of Development and Underdevelopment Chapter 5 Copyright © 2003 Pearson Education, Inc.

New Growth Theory: Endogenous Growth n n Motivation for the new growth theory The

New Growth Theory: Endogenous Growth n n n Motivation for the new growth theory

Underdevelopment as a Coordination Failure n n Coordination failures occur when agents’ inability to

Multiple Equilibria: A Diagrammatic Approach n n Generally, these models can be diagrammed by

Figure 5. 1 Multiple Equilibria Copyright © 2003 Pearson Education, Inc. Chapter 5 Slide

Starting Economic Development: The Big Push n n Sometimes market failures lead to a

Figure 5. 2 The Big Push Copyright © 2003 Pearson Education, Inc. Chapter 5

Further Problems of Multiple Equilibria n n Inefficient advantages of incumbency Behavior and norms

Kremer’s O-Ring Theory of Economic Development n The O-ring model Copyright © 2003 Pearson

Figure 5. 3 The O-Ring Production Function: Wage as a Function of Human Capital

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

Concepts for Review n n n n Agency costs Agent Aid failure Asymmetric information

Concepts for Review, cont’d n n n O-ring production function Pareto improvement Pecuniary externalities

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Underdevelopment as a Coordination Failure n n 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 Copyright © 2003 Pearson Education, Inc. Chapter 5 Slide 5

Multiple Equilibria: A Diagrammatic Approach n n 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 Copyright © 2003 Pearson Education, Inc. Chapter 5 Slide 6

Starting Economic Development: The Big Push n n Sometimes market failures lead to a need for public policy intervention The big push: a graphical model – assumptions Copyright © 2003 Pearson Education, Inc. Chapter 5 Slide 8

Starting Economic Development: The Big Push n n 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 n Why can’t the problem be solved by a ‘super-entrepreneur’? Copyright © 2003 Pearson Education, Inc. Chapter 5 Slide 10

Further Problems of Multiple Equilibria n n Inefficient advantages of incumbency Behavior and norms Linkages Inequality, multiple equilibria, and growth Copyright © 2003 Pearson Education, Inc. Chapter 5 Slide 11

Concepts for Review n n n n Agency costs Agent Aid failure Asymmetric information Big push Complementarities Complementary investments Copyright © 2003 Pearson Education, Inc. n n n n Congestion Coordination failure Deep intervention Endogenous growth theory Linkage Multiple equilibria New growth theory O-ring model Chapter 5 Slide 15

Concepts for Review, cont’d n n n O-ring production function Pareto improvement Pecuniary externalities Poverty trap Prisoners’ dilemma Public good n n n Copyright © 2003 Pearson Education, Inc. Romer’s endogenous growth model Solow residual Technological externalities Underdevelopment trap Where-to-meet dilemma Chapter 5 Slide 16