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The O-Ring Theory of Economic Development

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  • Kremer, Michael

Abstract

This paper proposes a production function describing processes subject to mistakes in any of several tasks. It shows that high-skill workers--those who make few mistakes--will be matched together in equilibrium, and that wages and output will rise steeply in skill. The model is consistent with large income differences between countries, the predominance of small firms in poor countries, and the positive correlation between the wages of workers in different occupations within enterprises. Imperfect observability of skill leads to imperfect matching and thus to spillovers, strategic complementarity, and multiple equilibria in education. Copyright 1993, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 108 (1993)
Issue (Month): 3 (August)
Pages: 551-75

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Handle: RePEc:tpr:qjecon:v:108:y:1993:i:3:p:551-75

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  1. Dechert, W. Davis & Nishimura, Kazuo, 1983. "A complete characterization of optimal growth paths in an aggregated model with a non-concave production function," Journal of Economic Theory, Elsevier, vol. 31(2), pages 332-354, December.
  2. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
  3. David Card & Alan Krueger, 1990. "School Quality and Black/White Relative Earnings: A Direct Assessment," Working Papers 652, Princeton University, Department of Economics, Industrial Relations Section..
  4. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
  5. Sobel, Joel, 1992. "How to Count to One Thousand," Economic Journal, Royal Economic Society, vol. 102(410), pages 1-8, January.
  6. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1990. "The Allocation of Talent: Implicationsfor Growth," University of Chicago - George G. Stigler Center for Study of Economy and State 65, Chicago - Center for Study of Economy and State.
  7. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  8. Charles Brown & James L. Medoff, 1989. "The Employer Size-Wage Effect," NBER Working Papers 2870, National Bureau of Economic Research, Inc.
  9. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
  10. Sattinger, Michael, 1975. "Comparative Advantage and the Distributions of Earnings and Abilities," Econometrica, Econometric Society, vol. 43(3), pages 455-68, May.
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  1. Graveyard of old economic ideas - Balanced and Unb...
    by YouNotSneaky! in YouNotSneaky on 2007-03-10 22:34:00
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