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Flavors of Growth Theories
Neoclassical growth:
– diminishing returns to capital  convergence
– Exogenous technology  progress
• Solow growth residual
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Endogenous growth:
– Increasing returns to capital
• Setback  permanent income gap
– Complementary investments
• Human capital/infrastructure/R&D  public role
Copyright © 2003 Pearson Education, Inc.
Chapter 5 Slide 1
New Growth Theory: Endogenous Growth
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The Romer model: the knowledge
embedded in K is a public good
 1
Yi  AKi Li K
Y  AK

   1
L

gn 
1     
Copyright © 2003 Pearson Education, Inc.
(5.1)
(5.2)
(5.3)
Chapter 5 Slide 2
Coordination Failure and Multiple Equilibria:
Chicken – Egg Problems/One – Time Fix
Copyright © 2003 Pearson Education, Inc.
Chapter 5 Slide 3
Coordination failures: some simple examples
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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
Copyright © 2003 Pearson Education, Inc.
Chapter 5 Slide 4
Intervention: The Big Push  Generate Sufficient
Income to Modernize
Wage W2 Multiple Equilibria (all modern, all traditional)
Copyright © 2003 Pearson Education, Inc.
Chapter 5 Slide 5
Need for BIG PUSH
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Create sufficiently large market
Fixed costs reduce income and demand initially
 insufficient demand
Agglomeration (urbanization) & industrialization
Infrastructure effects
Training effects
Copyright © 2003 Pearson Education, Inc.
Chapter 5 Slide 6
Need for Big Push: Why no super-entrepreneur?
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Capital market failures: Whom to trust?
Management: Principal – Agent Problem
Coordination of investment
Limited expertise: stick-to-knitting
Copyright © 2003 Pearson Education, Inc.
Chapter 5 Slide 7
Further Problems of Multiple
Equilibria
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Inefficient advantages of incumbency
Behavior and norms
Linkages
Inequality, multiple equilibria, and
growth
Copyright © 2003 Pearson Education, Inc.
Chapter 5 Slide 8