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Chapter 5

Contemporary Theories

Agency costs  Costs of monitoring managers and other employees (called agents, but in a slightly different sense than its usual definition of independent economic actors) and of designing and implementing schemes to ensure compliance or provide incentives to follow the wishes of the employer.

Agent  An economic actor, usually a firm, worker, or consumer, but possibly a government official, that chooses actions so as to maximize an objective.

Aid failure  A situation in which international develop­ment assistance has the effect of retarding development more than facilitating it (or at least assisting development significantly less than it could).  This may be due to the provision of advice that is well meant but, in practice, counterproductive to development objectives (false paradigms).  It also maybe due to the pernicious effects of tied aid, which assists the donor at the expense of the recipient.

Asymmetric information  A situation in which one party to a potential transaction (often a buyer, seller, lender, or borrower) has more information than another party

Big push  A concerted, economy-wide, and probably public policy-led, effort to initiate or accelerate economic development across a broad spectrum of new industries and skills. Fig. 5.2

Complementarity  When complementarities are present, an action taken by one firm, worker, or organization increases the incentives for other agents to take similar actions.  Complementarities often involve investments whose return depends on other investments being made by other agents.

Complementary investments  Investments that complement and facilitate other productive factors - for example, capital with labor, education and training of unskilled workers, pesticides and fertilizer on farmland.

Congestion  The opposite of a complementarity; an action taken by one agent that decreases the incentives for other agents to take similar actions.  For example, if most people travel on one highway between two cities, the incentive is present for travelers to try alternate routes.

Coordination failure  A state of affairs in which agents’ inability to coordinate their behavior (choices) leads to an outcome (equilibrium) that leaves all agents worse off than in an alternative situation that is also an equilibrium.

Deep intervention  A government policy that can move the economy to a preferred equilibrium, or even to a higher permanent rate of growth, that can then be self-sustaining, so that the policy need no longer be enforced, because the better equilibrium will then prevail without further intervention.

Endogenous growth theory  Economic growth generated by factors within the production process (e.g., economies of scale, increasing returns, induced technological change) as opposed to outside (exogenous) factors such as increases in population.  See new growth theory.

Linkage Connections between firms based on sales.  A backward linkage is one in which a firm buys a good from another firm to use as an input; a forward linkage is one in which a firm sells to another firm.  Such linkages are especially significant for industrialization strategy when one or more of the sectors involved have increasing returns to scale that a larger market takes advantage of.

Multiple equilibria  A condition in which more than one equilibrium exists.  These equilibria may be ranked, in the sense that one is preferred to an-other, but the unaided market will not move the economy to the preferred outcome.  Fig. 5.1

New growth theory  Also known as endogenous growth theory, an extension and modification of the traditional growth theory designed to explain why long-run equilibrium growth can be positive and divergent among countries and why capital tends to flow from poor to rich countries despite the formers low capital-labor ratios.  Compare traditional (neoclassical) growth theory.  See endogenous growth.

0-ring production function  A production function with strong complementarities among inputs, given by the products of the input qualities.  It emphasizes the idea that in advanced economies, many tasks and activities must be done well in order for any of them to have adequate value. Fig. 5.3

Pareto improvement  A situation in which one or more persons may be made better off without making anyone worse off.  Alternatively, it is a situation in which all persons are made better off.

Pareto optimal  A situation in which no one may be made better off without making someone else worse off.

Pecuniary externality  A positive or negative spillover effect on an agent’s costs or revenues.

Poverty trap  A bad equilibrium for a family, community or nation, involving a vicious cycle in which poverty and underdevelopment breed more poverty and underdevelopment, often from one generation to the next.

Public good  An entity that provides benefits to all individuals simultaneously and whose enjoyment by one person is in no way diminished by that of another.  Compare public bad.

Romer endogenous growth model  An endogenous growth model in which technological spillovers are present; the economy wide capital stock positively affects output at the industry level, so that there may be increasing returns to scale at the economy wide level.

Solow residual  The proportion of long-term economic growth not explained by growth in labor or capital and therefore assigned primarily to exogenous technological change.

Technological externality  A positive or negative spillover effect on a firm’s production function through some means other than market exchange, such as productivity benefits of “learning by watching” how other firms produce goods or services.  Compare pecuniary externalities.

Underdevelopment trap  A poverty trap at a regional or national level, in which underdevelopment tends to perpetuate itself over time.

Where-to-meet problem  A situation in which all parties would be better off cooperating than competing but lack information about how to do so.  If cooperation can be achieved, unlike the prisoners’ dilemma, there is no subsequent incentive to defect or cheat.


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