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Wealth Breeds Decline: Reversals of Leadership and Consumption Habits

  • Lionel Artige
  • Carmen Camacho
  • David De La Croix

In a two-region model, we formalize Kindleberger's idea that wealth breeds first more wealth, and then decline: when one region leads, its inhabitants develop consumption habits incompatible with the neces- sary investment in knowledge to remain the leader. This gives the other region a window of opportuni- ty to gain economic primacy. The theory suggests that differences across regions that have similar characteristics may persist even if physical capital flows from rich to poor regions. We study patterns of overtaking, alternating primacy, irreversible decline, and monotonic convergence, according to the initial dispersion of knowledge and the strength of consumption habits. Even though exogenous factors may matter on some occasions, we show that they are not necessary to reverse economic leadership.

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Article provided by Springer in its journal Journal of Economic Growth.

Volume (Year): 9 (2004)
Issue (Month): 4 (December)
Pages: 423-449

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Handle: RePEc:kap:jecgro:v:9:y:2004:i:4:p:423-449
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