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Endogenous time preference, investment and development traps

  • Haaparanta, Pertti

    ()

    (Helsinki School of Economics)

  • Puhakka, Mikko

    ()

    (University of Oulu)

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    We introduce endogenous time preference via investment in patience (farsightedness) in an overlapping generations growth model to study development traps. There is no investment in patience, if the economy is very poor, while if it is wealthy enough there is always such investment. We explore the conditions for the existence of the development trap, and study in detail a robust example of an economy with traps. It does not exist, if the economy's total factor productivity is large enough. Our results illustrate the complementarity between physical investment and investment in farsightedness. Our model may also explain why economic growth is affected by initial conditions. In addition we show that increased international capital mobility does not necessarily help economies to escape from development traps.

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    File URL: http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/dp/Documents/dp0404.pdf
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    Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 4/2004.

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    Length: 30 pages
    Date of creation: 05 Mar 2004
    Date of revision:
    Handle: RePEc:hhs:bofitp:2004_004
    Contact details of provider: Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
    Phone: + 358 10 831 2268
    Fax: + 358 10 831 2294
    Web page: http://www.suomenpankki.fi/bofit_en/
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    1. Paul Collier & Jan Willem Gunning, 1998. "Explaining African economic performance," Economics Series Working Papers WPS/1997-02.2, University of Oxford, Department of Economics.
    2. Elsa V. Artadi & Xavier Sala-i-Martín, 2003. "The economic tragedy of the XXth Century: Growth in Africa," Economics Working Papers 684, Department of Economics and Business, Universitat Pompeu Fabra.
    3. Angus Deaton, 2002. "Health, inequality, and economic development," Working Papers 270, Princeton University, Woodrow Wilson School of Public and International Affairs, Center for Health and Wellbeing..
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    5. Becker, Gary S & Mulligan, Casey B, 1997. "The Endogenous Determination of Time Preference," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 729-58, August.
    6. Becker, G.S. & Mulligan, C.B., 1994. "On the Endogenous Determination of Time Preference," University of Chicago - Economics Research Center 94-2, Chicago - Economics Research Center.
    7. Azariadis, Costas, 1996. " The Economics of Poverty Traps: Part One: Complete Markets," Journal of Economic Growth, Springer, vol. 1(4), pages 449-96, December.
    8. Bryan S. Graham & Jonathan R. W. Temple, 2004. "Rich nations, poor nations: how much can multiple equilibria explain?," The Institute for International Integration Studies Discussion Paper Series iiisdp017, IIIS.
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    10. Michael Stern, 2006. "Endogenous time preference and optimal growth," Economic Theory, Springer, vol. 29(1), pages 49-70, September.
    11. Buffie, Edward F, 1985. "Price-Output Dynamics, Capital Inflows and Real Appreciation," Oxford Economic Papers, Oxford University Press, vol. 37(4), pages 529-51, December.
    12. Das, Mausumi, 2003. "Optimal growth with decreasing marginal impatience," Journal of Economic Dynamics and Control, Elsevier, vol. 27(10), pages 1881-1898, August.
    13. T. Paul Schultz, 2003. "Human Capital, Schooling and Health Returns," Working Papers 853, Economic Growth Center, Yale University.
    14. Galor, Oded & Ryder, Harl E., 1989. "Existence, uniqueness, and stability of equilibrium in an overlapping-generations model with productive capital," Journal of Economic Theory, Elsevier, vol. 49(2), pages 360-375, December.
    15. Stephen L. Parente & Edward C. Prescott, 2002. "Barriers to Riches," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661306, June.
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