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    4 Contemporary Models of Devt Underdevt

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    4 Contemporary Models of Devt Underdevt

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    contemporary models

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    contemporary models

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    © All Rights Reserved
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    Download as pdf or txt
    11 views54 pages

    4 Contemporary Models of Devt Underdevt

    Uploaded by

    温埃德
    contemporary models

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 54

    Chapter 4

    Contemporary
    Models of
    Development and
    Underdevelopment
    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-2
    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-3
    Introduction
    Development does not happen automatically; it
    requires systematic effort → What makes the study
    of economic development so important

    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-4


    Introduction

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    4.1 Underdevelopment as a
    Coordination Failure

    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-13


    4.1 Underdevelopment as a
    Coordination Failure
    • A newer school of thought on problems of
    economic development
    • Coordination failures occur when agents’ inability
    to coordinate their actions leads to an outcome
    that makes all agents worse off.
    • This can occur when actions are complementary,
    i.e.,
    • Actions taken by one agent reinforces incentives
    for others to take similar actions
    • This circumstance can, under some
    circumstances, lead to multiple equilibria

    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-14


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    optimal level.

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    4.2 Multiple Equilibria
    • The existence of more than one solution to the
    equations describing the equilibrium of an
    economic model.
    • The multiple equilibria can be locally unique or
    there can be a range / variety of
    symmetries/stabilities.
    • If the equilibria are locally unique there is
    generally an odd number of them.
    • This fact is useful in computing the set of Nash
    equilibria for a game.

    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-25


    What is multiple equilibria in economic
    development?

    The existence of more than one solution to the


    equations describing the equilibrium of an economic
    model. The multiple equilibria can be locally unique or
    there can be a continuum of equilibria. If the equilibria
    are locally unique there is generally an odd number of
    them.

    What are equilibrium examples?


    1. An example of equilibrium in economics ‘when supply and
    demand are equal.

    2. If there are two pure strategy equilibria there must be at


    least one mixed strategy equilibrium.

    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-26


    4.2 Multiple Equilibria: A
    Diagrammatic Approach
    • Often, these models can be diagrammed by graphing an
    S-shaped function and the 45º line

    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-27


    Figure 4.1 Multiple Equilibria

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    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-29
    4.3 Starting Economic
    Development: The Big Push
    • Sometimes market failures lead to a need for public policy
    intervention
    • The Big Push: A Graphical Model, 6 assumptions
    – One factor of production
    – Two sectors
    – Same production function for each sector
    – Consumers spend an equal amount on each good
    – Closed economy
    – Perfect competition with traditional firms operating, limit pricing
    monopolist with a modern firm operating
    • Conditions for Multiple Equilibria
    • A big push may also be necessary when there are:
    – Intertemporal effects
    – Urbanization effects
    – Infrastructure effects
    – Training effects

    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-30


    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-31
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    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-36
    Figure 4.2 The Big Push

    Modernization of one good is a positive externality for


    all other goods because of the induced rise in sales
    and production

    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-37


    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-38
    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-39
    Why the Problem Cannot be Solved by a
    Super-Entrepreneur

    • Super Entrepreneur?
    – Capital market failures
    – Cost of monitoring managers- Asymmetric
    Information
    – Communication failures
    – Limits to knowledge
    – Lack of any empirical evidence that would
    suggest this is possible

    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-40


    In a Nutshell: Big Push
    Mechanisms
    • Raising total demand
    • Reducing fixed costs of later entrants
    • Redistributing demand to later periods when other
    industrializing firms sell
    • Shifting demand toward manufacturing goods
    (usually produced in urban areas)
    • Help defray costs of essential infrastructure (a
    similar mechanism can hold when there are costs
    of training, and other shared intermediate inputs)

    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-41


    4.4 Further Problems of Multiple
    Equilibria

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    4.5 Michael Kremer’s O-Ring Theory
    of Economic Development

    • The O-Ring Model


    – Production is modeled with strong
    complementarities among inputs
    – Positive assortative matching in production
    • Implications of strong complementarities for
    economic development and the distribution
    of income across countries

    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-47


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    Copyright ©2015 Pearson Education, Inc. All rights reserved. 4-54

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