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From Tradition to Modernity: Economic Growth in a Small World

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  • Ines Lindner

    (VU University Amsterdam)

  • Holger Strulik

    (University of Goettingen)

Abstract

This paper introduces the Small World model (Watts and Strogatz, Nature, 1998) into the theory of economic growth and investigates how increasing economic integration affects firm size and efficiency, norm enforcement, and aggregate economic performance. When economic integration is low and local connectivity is high, informal norms control entrepreneurial behavior and more integration mainly improves search for efficient investment opportunities. At a higher level of economic integration neighborhood enforcement deteriorates and formal institutions are needed to keep entrepreneurs in check. A gradual take-off to perpetual growth is explained by a feedback effect from investment to the formation of long-distance links and the diffusion of knowledge. If formal institutions are weak, however, the economy does not take off but stagnates at an intermediate income level. Structurally, the equilibrium of stagnation differs from balanced growth by the presence of relatively many small firms of low productivity.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 12-035/1.

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Date of creation: 10 Apr 2012
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Handle: RePEc:dgr:uvatin:20120035

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Keywords: modernization; economic integration; firm size; norms; networks; knowledge spillovers; growth;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. More on institutions and growth
    by Economic Logician in Economic Logic on 2011-09-15 14:41:00
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Cited by:
  1. Lindner, Ines & Strulik, Holger, 2014. "The great divergence: A network approach," Center for European, Governance and Economic Development Research Discussion Papers 193, University of Goettingen, Department of Economics.
  2. Prettner, Klaus & Strulik, Holger, 2013. "Trade and productivity: The family connection redux," Center for European, Governance and Economic Development Research Discussion Papers 159, University of Goettingen, Department of Economics.

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