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From Tradition to Modernity: Economic Growth in a Small World

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  • Lindner, Ines
  • Strulik, Holger

Abstract

This paper introduces the Small World model (Watts and Strogatz, Nature, 1998) into the theory of economic growth and investigates how increasing economic integration affects firm size and effciency, norm enforcement, and aggregate economic performance. When economic integration is low and local connectivity is high, informal norms control entrepreneurial behavior and more integration mainly improves search for effcient investment opportunities. At a higher level of economic integration neighborhood enforcement deteriorates and formal institutions are needed to keep entrepreneurs in check. A gradual take-off to perpetual growth is explained by a feedback effect from investment to the formation of long-distance links and the diffusion of knowledge. If formal institutions are weak, however, the economy does not take off but stagnates at an intermediate income level. Structurally, the equilibrium of stagnation differs from balanced growth by the presence of relatively many small firms of low productivity.

Suggested Citation

  • Lindner, Ines & Strulik, Holger, 2011. "From Tradition to Modernity: Economic Growth in a Small World," Hannover Economic Papers (HEP) dp-478, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  • Handle: RePEc:han:dpaper:dp-478
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    File URL: http://diskussionspapiere.wiwi.uni-hannover.de/pdf_bib/dp-478.pdf
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    References listed on IDEAS

    as
    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Oded Galor & Omer Moav, 2002. "Natural Selection and the Origin of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1133-1191.
    3. Alessandra Fogli & Laura Veldkamp, 2012. "Germs, Social Networks and Growth," NBER Working Papers 18470, National Bureau of Economic Research, Inc.
    4. Zak, Paul J & Knack, Stephen, 2001. "Trust and Growth," Economic Journal, Royal Economic Society, vol. 111(470), pages 295-321, April.
    5. Andrei Shleifer & Florencio Lopez-de-Silanes & Rafael La Porta, 2008. "The Economic Consequences of Legal Origins," Journal of Economic Literature, American Economic Association, vol. 46(2), pages 285-332, June.
    6. Marcel Fafchamps, 2006. "Development and social capital," Journal of Development Studies, Taylor & Francis Journals, vol. 42(7), pages 1180-1198.
    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. More on institutions and growth
      by Economic Logician in Economic Logic on 2011-09-15 19:41:00

    Citations

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    Cited by:

    1. Ines Lindner & Holger Strulik, 2017. "Innovation and Inequality in a Small World," Tinbergen Institute Discussion Papers 17-057/II, Tinbergen Institute.
    2. Javier Mejia, 2018. "Social Networks and Entrepreneurship. Evidence from a Historical Episode of Industrialization," Working Papers 20180020, New York University Abu Dhabi, Department of Social Science, revised Sep 2018.
    3. Prettner, Klaus & Strulik, Holger, 2018. "Trade and productivity: The family connection redux," Journal of Macroeconomics, Elsevier, vol. 56(C), pages 276-291.
    4. Lindner, Ines & Strulik, Holger, 2014. "The great divergence: A network approach," Center for European, Governance and Economic Development Research Discussion Papers 193, University of Goettingen, Department of Economics.
    5. Javier Mejia, 2018. "Social Interactions and Modern Economic Growth," Working Papers 20180021, New York University Abu Dhabi, Department of Social Science, revised Sep 2018.
    6. Maria Rosaria Carillo & Vincenzo Lombardo & Alberto Zazzaro, 2015. "Family Firms and Entrepreneurial Human Capital in the Process of Development," CSEF Working Papers 400, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    7. Hippolyte D'Albis & Angela Greulich & Grégory Ponthière, 2017. "Development, fertility and childbearing age: A unified growth theory," PSE Working Papers halshs-01452846, HAL.
    8. repec:spr:jeicoo:v:13:y:2018:i:1:d:10.1007_s11403-017-0202-7 is not listed on IDEAS
    9. Robert Huggins & Piers Thompson, 2015. "Entrepreneurship, innovation and regional growth: a network theory," Small Business Economics, Springer, vol. 45(1), pages 103-128, June.

    More about this item

    Keywords

    modernization; economic integration; firm size; norms; networks; knowledge spillovers; growth;

    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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