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Coordination and Development

Listed author(s):
  • José Pedro Pontes
  • Joana Pais

This paper addresses the issue of industrial development using a coordination game. Complementarities between transport infrastructure provision by the Government and consumer goods manufacturing firms, and among consumer goods firms themselves dictate the outcome: either the transport infrastructure (i.e., a highway) is not built and firms keep doing “home” production, thus supplying mainly nearby consumers and dispensing with a highway; or they switch to “factory” production, a more spatially centralized regime, where output must be sold over long distances, thus implying the construction of a highway. In relation to the existent literature, this paper presents two main innovations. Firstly, the two sources of linkage, namely cost linkage, through the provision of an indivisible input (the highway), and demand linkage, through the wage rise brought about by industrialization, are not treated separately, but they are integrated in the same model. Consequently, the game has now two levels of equilibrium selection. Secondly, the paper does not limit itself to checking that there can arise multiple Nash equilibria under certain circumstances, but it discusses methods for the selection of a unique outcome. Consequently, in addition to the classical Nash equilibria mentioned above, there is a third possible solution where the Government builds the highway but the consumer goods firms refrain from using it and stick to “home” production. Hence, the transport infrastructure becomes a “white elephant”.

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Paper provided by ISEG - School of Economics and Management, Department of Economics, University of Lisbon in its series Working Papers Department of Economics with number 2013/29.

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Date of creation: Dec 2013
Handle: RePEc:ise:isegwp:wp292013
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Department of Economics, ISEG - School of Economics and Management, University of Lisbon, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL

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