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On The Roots Of Underdevelopment:“Wrong Equilibrium” Or “Miscoordination”?

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  • JOSE PEDRO PONTES
  • TELMO PEIXE

Abstract

. This paper examines the Big Push industrialization model due to [Murphy et al., 1989] by featuring a game where public and private agents must coordinate their complementary investment decisions and the outcome where all agents invest dominates in payoffs the no-investment alternative.Two different paths of analysis are pursued. If the coordination game has complete information, the selection of the “right” equilibrium appears to be easier if the initial level of total factor productivity (TFP) is not too low. The comparison of the “payoff dominance” and the “risk dominance” criteria due to [Harsanyi and Selten, 1988]shows that the ability to plan jointly different kinds of investment relaxes the constraint on initial TFP. Industrialization can be alternatively modelled as an incomplete information game. In this case,underdevelopment follows from a coordination break, where typically the Government supplies infrastructures which remain underused because the private sector fails to modernize. We find out that such a coordination break is likelier in economies where the starting level of TFP is low. Consequently, a low initial TFP level tends to create a “Poverty Trap”, which however can be overcome by enhancing the ability to coordinate different kinds of investment, namely public and private.

Suggested Citation

  • Jose Pedro Pontes & Telmo Peixe, 2021. "On The Roots Of Underdevelopment:“Wrong Equilibrium” Or “Miscoordination”?," Working Papers REM 2021/0187, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
  • Handle: RePEc:ise:remwps:wp01872021
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    More about this item

    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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