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Rational Underdevelopment


  • Klaus Desmet

    () (Banco de España)

  • Ignacio Ortuño Ortín

    () (Universidad de Alicante)


We propose a two-region two-sector model of uneven development, where technological change benefits either the lagging or the leading region. In this framework inter-regional transfers may lead to persistent underdevelopment; by raising wages without changing productivity, transfers reduce the chance of the backward region adopting a new technology and taking off. Due to uncertainty about which region benefits from technological change, the backward region may rationally choose to remain underdeveloped, while the advanced region continues to pay transfers. The Model provides a rationale for cases, such as Italy's Mezzogiorno, where the same rich region subsidizes the same poor region on a continuous basis.

Suggested Citation

  • Klaus Desmet & Ignacio Ortuño Ortín, 2001. "Rational Underdevelopment," Working Papers 0114, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0114

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    References listed on IDEAS

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    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Amit Batabyal & Peter Nijkamp, 2014. "Technology, Learning, and Long Run Economic Growth in Leading and Lagging Regions," ERSA conference papers ersa14p893, European Regional Science Association.
    2. Gilad Aharonovitz, 2011. "Knowledge-based spatial differences in economic activity, job related migration and housing related migration," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 46(1), pages 159-188, February.
    3. Klaus Desmet & Ignacio Ortuño Ortín, 2007. "Rational Underdevelopment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(1), pages 1-24, March.
    4. Batabyal, Amitrajeet & Nijkamp, Peter, 2014. "Some properties of the technology gap between leading and lagging regions," MPRA Paper 71596, University Library of Munich, Germany.
    5. Ramon Tremosa-i-Balcells & Joan Costa-i-Font, "undated". "The "relative competitiveness" patterns of Spanish regions after the European Monetary Union (1999-2002)," Studies on the Spanish Economy 169, FEDEA.

    More about this item

    JEL classification:

    • R58 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Regional Development Planning and Policy
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations


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