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Endogenous time preference, investment and development traps

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Author Info
Haaparanta, Pertti () (Helsinki School of Economics)
Puhakka, Mikko () (University of Oulu)
Abstract

We introduce endogenous time preference via investment in patience (farsightedness) in an overlapping generations growth model to study development traps. There is no investment in patience, if the economy is very poor, while if it is wealthy enough there is always such investment. We explore the conditions for the existence of the development trap, and study in detail a robust example of an economy with traps. It does not exist, if the economy's total factor productivity is large enough. Our results illustrate the complementarity between physical investment and investment in farsightedness. Our model may also explain why economic growth is affected by initial conditions. In addition we show that increased international capital mobility does not necessarily help economies to escape from development traps.

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Publisher Info
Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 4/2004.

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Length: 30 pages
Date of creation: 05 Mar 2004
Date of revision:
Handle: RePEc:hhs:bofitp:2004_004

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Related research
Keywords: development trap; overlapping generations;

Find related papers by JEL classification:
I30 - Health, Education, and Welfare - - Welfare and Poverty - - - General
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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  3. Michael Stern, 2006. "Endogenous time preference and optimal growth," Economic Theory, Springer, vol. 29(1), pages 49-70, September. [Downloadable!] (restricted)
  4. Xavier Sala-i-Martin & Elsa V. Artadi, 2003. "The economic tragedy of the XXth century: Growth in Africa," Discussion Papers 0203-17, Columbia University, Department of Economics. [Downloadable!]
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  5. Jones, Charles I, 1997. " Convergence Revisited," Journal of Economic Growth, Springer, vol. 2(2), pages 131-53, July. [Downloadable!] (restricted)
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  6. Costas Azariadis, 1996. "The Economics of Poverty Traps Part One: Complete Markets," Working Papers 9606, Centro de Investigacion Economica, ITAM.
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  7. Galor, Oded & Ryder, Harl E., 1989. "Existence, uniqueness, and stability of equilibrium in an overlapping-generations model with productive capital," Journal of Economic Theory, Elsevier, vol. 49(2), pages 360-375, December. [Downloadable!] (restricted)
  8. Angus Deaton, 2003. "Health, Inequality, and Economic Development," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 113-158, March.
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  9. Paul Collier & Jan Willem Gunning, 1999. "Explaining African Economic Performance," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 64-111, March. [Downloadable!] (restricted)
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  10. T. Paul Schultz, 2004. "Human Capital, Schooling and Health Returns," Yale School of Management Working Papers ysm358, Yale School of Management. [Downloadable!]
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  11. Das, Mausumi, 2003. "Optimal growth with decreasing marginal impatience," Journal of Economic Dynamics and Control, Elsevier, vol. 27(10), pages 1881-1898, August. [Downloadable!] (restricted)
  12. Stephen L. Parente & Edward C. Prescott, 2002. "Barriers to Riches," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661306.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bhattacharya, Joydeep & Qiao, Xue, 2005. "Public and Private Expenditures on Health in a Growth Model," Staff General Research Papers 12378, Iowa State University, Department of Economics. [Downloadable!]
  2. Michal Bauer & Julie Chytilová, 2007. "Does Education Matter in Patience Formation? Evidence from Ugandan Villages," Working Papers IES 2007/10, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Feb 2007. [Downloadable!]
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