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Start-Up Costs and Pecuniary Externalities as Barriers to Economic Development

  • Antonio Ciccone
  • Kiminori Matsuyama

One critical aspect of economic development is that productivity growth and a rising standard of living are realized through more roundabout methods of production and increasing specialization of intermediate inputs and producer services. We use an extended version of the Judd-Grossman-Helpman model of dynamic monopolistic competition to show that an economy that inherits a small range of specialized inputs can be trapped into a lower stage of development. The limited availability of specialized inputs forces the final goods producers to use a labor intensive technology, which in turns implies a small inducement to introduce new intermediate products. The start-up costs, which make the intermediate goods producers subject to dynamic increasing returns, and pecuniary externalities that result from the factor substitution in the final goods sector, play essential roles in the model.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4363.

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Date of creation: May 1993
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Publication status: published as Journal of Development Economics, April, 1996.
Handle: RePEc:nbr:nberwo:4363
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