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Why Don't Poor Countries Adopt Better Technologies?




In this paper we develop a simple heterogeneous-agent model with incomplete markets to explain the prevalence of a large low-productivity, informal sector in developing countries. In our model, the provision of public infrastructure creates a productivity premium for formalization, which increases with infrastructure quality. Our model breaks the symmetry of equilibria and offers endogenous differentiation of rich and poor countries' behavior. While the model supports multiple stable equilibria in `rich' countries with varying degrees of formalization, including full formalization, it indicates an absence of equilibrium with full formalization in `poorer' countries. If legislative intolerance alone suffices to jolt a rich country into the equilibrium with complete formalization, accompanying policies may be required in poor countries to first provide the conditions for existence of such equilibrium.

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  • Sylvain Dessy & Stephane Pallage, 2001. "Why Don't Poor Countries Adopt Better Technologies?," Cahiers de recherche du Département des sciences économiques, UQAM 20-07, Université du Québec à Montréal, Département des sciences économiques.
  • Handle: RePEc:cre:uqamwp:20-07

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    References listed on IDEAS

    1. Fortin, Bernard & Marceau, Nicolas & Savard, Luc, 1997. "Taxation, wage controls and the informal sector," Journal of Public Economics, Elsevier, vol. 66(2), pages 293-312, November.
    2. Adsera, Alicia & Ray, Debraj, 1998. "History and Coordination Failure," Journal of Economic Growth, Springer, vol. 3(3), pages 267-276, September.
    3. Saint-Paul, Gilles & Verdier, Thierry, 1993. "Education, democracy and growth," Journal of Development Economics, Elsevier, vol. 42(2), pages 399-407, December.
    4. Kremer, Michael & Chen, Daniel L, 2002. "Income Distribution Dynamics with Endogenous Fertility," Journal of Economic Growth, Springer, vol. 7(3), pages 227-258, September.
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    6. Paul Krugman, 1991. "History versus Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 651-667.
    7. Matsuyama, Kiminori, 1996. "Why Are There Rich and Poor Countries? Symmetry-Breaking in the World Economy," Journal of the Japanese and International Economies, Elsevier, vol. 10(4), pages 419-439, December.
    8. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1989. "Industrialization and the Big Push," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1003-1026, October.
    9. Cecilia Garcia-Penalosa & Eve Caroli & Philippe Aghion, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1615-1660, December.
    10. Easterly, William, 2001. "The Middle Class Consensus and Economic Development," Journal of Economic Growth, Springer, vol. 6(4), pages 317-335, December.
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    12. Dessy, Sylvain E. & Pallage, Stephane, 2001. "Child labor and coordination failures," Journal of Development Economics, Elsevier, vol. 65(2), pages 469-476, August.
    13. Daniel Chen & Michael Kremer, 1999. "Income-Distribution Dynamics with Endogenous Fertility," American Economic Review, American Economic Association, vol. 89(2), pages 155-160, May.
    14. repec:dau:papers:123456789/10091 is not listed on IDEAS
    15. Jane E. Ihrig & Karine S. Moe, 2000. "The dynamics of informal employment," International Finance Discussion Papers 664, Board of Governors of the Federal Reserve System (U.S.).
    16. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
    17. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    18. Parente, Stephen L & Prescott, Edward C, 1994. "Barriers to Technology Adoption and Development," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 298-321, April.
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    More about this item


    Technology adoption; informal sector; industrialization; inequality; infrastructure;

    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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