ON THE ROOTS OF UNDERDEVELOPMENT:“WRONG EQUILIBRIUM” OR “MISCOORDINATION”?

José Pontes and Telmo Peixe

No 2021/0187, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: 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.

JEL-codes: C71 C72 C73 O10 O14 (search for similar items in EconPapers)
Date: 2021-07
New Economics Papers: this item is included in nep-gth
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