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Endogenous time preference, investment and development traps

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  • Haaparanta, Pertti

    ()
    (Helsinki School of Economics)

  • Puhakka, Mikko

    ()
    (University of Oulu)

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    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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    File URL: http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/dp/Documents/dp0404.pdf
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    Bibliographic 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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    Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
    Phone: + 358 10 831 2268
    Fax: + 358 10 831 2294
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    Web page: http://www.suomenpankki.fi/bofit_en/
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    Related research

    Keywords: development trap; overlapping generations;

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    References

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    1. Elsa V. Artadi & Xavier Sala-i-Martin, 2003. "The Economic Tragedy of the XXth Century: Growth in Africa," NBER Working Papers 9865, National Bureau of Economic Research, Inc.
    2. Bryan S. Graham & Jonathan R. W. Temple, 2004. "Rich nations, poor nations: how much can multiple equilibria explain?," The Institute for International Integration Studies Discussion Paper Series iiisdp017, IIIS.
    3. Stephen L. Parente & Edward C. Prescott, 2002. "Barriers to Riches," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661306, December.
    4. 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.
    5. Gary S. Becker & Casey B. Mulligan, 1994. "On the Endogenous Determination of Time Preference," University of Chicago - George G. Stigler Center for Study of Economy and State 98, Chicago - Center for Study of Economy and State.
    6. Jan Willem Gunning & Paul Collier, 1999. "Explaining African Economic Performance," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 64-111, March.
    7. Angus Deaton, 2002. "Health, inequality, and economic development," Working Papers 209, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
    8. Buffie,Edward F., 2001. "Trade Policy in Developing Countries," Cambridge Books, Cambridge University Press, number 9780521004268, April.
    9. Costas Azariadis, 1996. "The Economics of Poverty Traps Part One: Complete Markets," Working Papers 9606, Centro de Investigacion Economica, ITAM.
    10. Becker, Gary S & Mulligan, Casey B, 1997. "The Endogenous Determination of Time Preference," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 729-58, August.
    11. Charles I. Jones, . "Convergence Revisited," Working Papers 96006, Stanford University, Department of Economics.
    12. T. Paul Schultz, 2003. "Human Capital, Schooling and Health Returns," Working Papers 853, Economic Growth Center, Yale University.
    13. Das, Mausumi, 2003. "Optimal growth with decreasing marginal impatience," Journal of Economic Dynamics and Control, Elsevier, vol. 27(10), pages 1881-1898, August.
    14. Michael Stern, 2006. "Endogenous time preference and optimal growth," Economic Theory, Springer, vol. 29(1), pages 49-70, September.
    15. Buffie, Edward F, 1985. "Price-Output Dynamics, Capital Inflows and Real Appreciation," Oxford Economic Papers, Oxford University Press, vol. 37(4), pages 529-51, December.
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    Cited by:
    1. 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.
    2. 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.
    3. Sarkar, Jayanta, 2007. "Growth dynamics in a model of endogenous time preference," International Review of Economics & Finance, Elsevier, vol. 16(4), pages 528-542.

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