Contemporary Models of Development and Underdevelopment

2. Contemporary Models of Development and Underdevelopment Chapter 5

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

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

5. 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

6. 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

7. Figure 5.1 Multiple Equilibria

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

9. Figure 5.2 The Big Push

10. 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’?

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

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

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

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

15. 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

16. 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 Concepts for Review, cont’d