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Rational Underdevelopment

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  • Klaus Desmet

    ()
    (Banco de España)

  • Ignacio Ortuño Ortín

    ()
    (Universidad de Alicante)

Abstract

We propose a two-region two-sector model of uneven development, where technological change benefits either the lagging or the leading region. In this framework inter-regional transfers may lead to persistent underdevelopment; by raising wages without changing productivity, transfers reduce the chance of the backward region adopting a new technology and taking off. Due to uncertainty about which region benefits from technological change, the backward region may rationally choose to remain underdeveloped, while the advanced region continues to pay transfers. The Model provides a rationale for cases, such as Italy's Mezzogiorno, where the same rich region subsidizes the same poor region on a continuous basis.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/01/Fic/dt0114e.pdf
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Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0114.

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Date of creation: 2001
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Handle: RePEc:bde:wpaper:0114

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  1. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Moral Hazard," Econometrica, Econometric Society, vol. 64(3), pages 623-46, May.
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  4. Ignacio Ortuño Ortín & Klaus Desmet, 2006. "Rational Underdevelopment," Working Papers. Serie AD 2006-12, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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  15. Gerlinde Sinn & Hans-Werner Sinn, 1994. "Jumpstart: The Economic Unification of Germany," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262691728, December.
  16. David E. Wildasin, 1994. "Income Redistribution and Migration," Canadian Journal of Economics, Canadian Economics Association, vol. 27(3), pages 637-56, August.
  17. Brunello, Giorgio & Lupi, Claudio & Ordine, Patrizia, 2001. "Widening differences in Italian regional unemployment," Labour Economics, Elsevier, vol. 8(1), pages 103-129, January.
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  21. Basile, Roberto & Padoa Schioppa, Fiorella Kostoris, 2002. "Unemployment Dynamics of the 'Mezzogiornos of Europe': Lessons for the Mezzogiorno of Italy," CEPR Discussion Papers 3594, C.E.P.R. Discussion Papers.
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Cited by:
  1. Klaus Desmet & Ignacio Ortuño Ortín, 2001. "Rational Underdevelopment," Banco de Espa�a Working Papers 0114, Banco de Espa�a.
  2. Gilad Aharonovitz, 2011. "Knowledge-based spatial differences in economic activity, job related migration and housing related migration," The Annals of Regional Science, Springer, vol. 46(1), pages 159-188, February.
  3. Ramon Tremosa-i-Balcells & Joan Costa-i-Font, . "The "relative competitiveness" patterns of Spanish regions after the European Monetary Union (1999-2002)," Studies on the Spanish Economy 169, FEDEA.

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