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Coordination Failure in Technological Progress, Economic Growth and Volatility

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  • Mei Li

    ()
    (Queen's University)

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Abstract

Technological progress has long been posited to be crucial in a country's economic growth. This paper argues that coordination failure in a country's new technology investment can be one of the barriers in a country's capital accumulation and economic growth. The global game established by Morris and Shin(2000) is extended to a two-sector overlapping generations model where capital goods can be produced by two different technologies. The first is a conventional technology with constant returns, which are perfectly revealed to economic agents. The second is a new technology exhibiting increasing return to scale due to technological externalities, whose returns economic agents only have incomplete information about. Economic agents have to choose which technology to invest in. My model reveals that under certain circumstances coordination failure in the capital goods sector will occur and be manifested as under-investment in the new technology. In this way, I explain how coordination failure in a country's technology updating process leads to slower capital accumulation and economic growth. More interestingly, the model generates a positive correlation between economic growth and volatility through a new channel associated with coordination failure. Policy implications are discussed as well.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1147.pdf
File Function: First version 2007
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1147.

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Length: 36 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:qed:wpaper:1147

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Keywords: Economic Growth; Technological externalities; Coordination Failure;

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  1. Carlsson, H. & Damme, E.E.C. van, 1990. "Global games and equilibrium selection," Discussion Paper 1990-52, Tilburg University, Center for Economic Research.
  2. Rui Castro & Gian Luca Clementi & Glenn McDonald, 2007. "Legal Institutions, Sectoral Heterogeneity, and Economic Development," Working Paper Series 05-07, The Rimini Centre for Economic Analysis, revised Jul 2007.
  3. Stephen Morris & Hyun S Shin, 2001. "Global Games: Theory and Applications," Levine's Working Paper Archive 122247000000001080, David K. Levine.
  4. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  5. Ricardo J. Caballero & Richard K. Lyons, 1989. "The Role of External Economies in U.S. Manufacturing," NBER Working Papers 3033, National Bureau of Economic Research, Inc.
  6. George-Marios Angeletos & Alessandro Pavan, 2004. "Transparency of Information and Coordination in Economies with Investment Complementarities," Discussion Papers 1494, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Stephen Morris & Hyun Song Shin, 2001. "Rethinking Multiple Equilibria in Macroeconomic Modeling," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 139-182 National Bureau of Economic Research, Inc.
  8. Ennis, Huberto M. & Keister, Todd, 2003. "Economic growth, liquidity, and bank runs," Journal of Economic Theory, Elsevier, vol. 109(2), pages 220-245, April.
  9. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-97, June.
  10. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October.
  11. Vives, Xavier, 2004. "Complementarities and Games: New Developments," CEPR Discussion Papers 4742, C.E.P.R. Discussion Papers.
  12. Caballero, Ricardo J. & Lyons, Richard K., 1990. "Internal versus external economies in European industry," European Economic Review, Elsevier, vol. 34(4), pages 805-826, June.
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