Working Paper: NBER ID: w3719
Authors: Steven N. Durlauf
Abstract: This paper explores the role of complementarities and coordination failure in economic growth. We analyze the evolution composed of a countable set of infinitely-lived heterogenous industries. Individual industries exhibit nonconvexities in production and are linked across time through localized technological complementarities. Each industry employs one of two production techniques. One technique is more efficient in using capital than the other, but requires the payment of a fixed capital cost. Both techniques exhibit technological complementarities in the sense that the productivity of capital invested in a technique is a function of the technique choices made by various industries the previous period. These complementarities, when strong enough, interact with incompleteness of markets to produce multiple Pareto-rankable equilibria in ling run economic activity. The equilibria have a simple probabilistic structure that demonstrates how localized coordination failures can affect the aggregate equilibrium. The model is capable of generating interesting aggregate dynamics as coordination problems become the source of aggregate volatility. Modifications of the model illustrate how leading sectors can cause a takeoff into high growth.
Keywords: Economic Growth; Coordination Failure; Complementarities
JEL Codes: O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strong technological complementarities across industries (L69) | multiple Pareto-rankable equilibria (D50) |
| coordination failures (P11) | aggregate volatility (E10) |
| changes in one industry's production decisions (L23) | alter the constraint sets of other industries (L79) |
| leading sectors (L16) | takeoff in economic growth (O49) |
| growth of a leading sector (O41) | growth dynamics of other sectors (O49) |