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Flavors of Growth Theories

Flavors of Growth Theories. Neoclassical growth: diminishing returns to capital  convergence Exogenous technology  progress Solow growth residual Endogenous growth: Increasing returns to capital Setback  permanent income gap Complementary investments

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Flavors of Growth Theories

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  1. Flavors of Growth Theories • Neoclassical growth: • diminishing returns to capital  convergence • Exogenous technology  progress • Solow growth residual • Endogenous growth: • Increasing returns to capital • Setback  permanent income gap • Complementary investments • Human capital/infrastructure/R&D  public role

  2. New Growth Theory: Endogenous Growth • The Romer model: the knowledge embedded in K is a public good (5.1) (5.2) (5.3)

  3. Coordination Failure and Multiple Equilibria: Chicken – Egg Problems/One – Time Fix

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

  5. Intervention: The Big Push  Generate Sufficient Income to ModernizeWage W2 Multiple Equilibria (all modern, all traditional)

  6. Need for BIG PUSH • Create sufficiently large market • Fixed costs reduce income and demand initially  insufficient demand • Agglomeration (urbanization) & industrialization • Infrastructure effects • Training effects

  7. Need for Big Push: Why no super-entrepreneur? • Capital market failures: Whom to trust? • Management: Principal – Agent Problem • Coordination of investment • Limited expertise: stick-to-knitting

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

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