Lecture3 - Coordination, Cooperation and Conflict...

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Unformatted text preview: Coordination, Cooperation and Conflict Development Economics Lecture Notes 3 Alper Duman March 20, 2009 Alper Duman Development Economics Lecture Notes 3 Coordination, Cooperation and Conflict I From World War II to 1990s, the old paradigm dominating the field has failed. Only very few countries could have ’taken-off’ I Even if the countries have liberalized both the trade and capital markets, the liberal recipe has not worked for them I Economists realized that development of an economy should be considered not only as a process in which not only the factor of production along with the technological improvement but also asa process of institutional change Alper Duman Development Economics Lecture Notes 3 Coordination, Cooperation and Conflict Michael Kremer’s O-Ring Theory The basic insight of Michael Kremer’s O-Ring model is that modern production activities require various complementary tasks to be undertaken in accordance. Consider a firm carrying out n number of tasks. These tasks can be handle by various people with various skill levels, q i where 0 ≤ q i ≤ 1. The higher the skill the higher the probability of completion of the task successfully. Further assume that the production function is simply the multiplication of tasks completed. Hence for a firm that employs only two workers for simplicity we have the production function, F as F ( q i q j ) = q i q j Alper Duman Development Economics Lecture Notes 3 Coordination, Cooperation and Conflict The model also requires some further simplifying assumptions: (1) Firms are risk-neutral, (2) Labor markets are competitive, (3) Labor supply is inelastic (4) The economy is a closed one The most important feature of the model is positive assortive matching . Workers with high skills are compelled to work with other workers who have also high skills. A firm with a higher-productivity worker can earn more, and afford to pay more to the other higher-productivity workers, than a firm with one low and one high-productivity worker....
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This note was uploaded on 08/06/2009 for the course ECONOMICS ECON426 taught by Professor Alperduman during the Spring '09 term at Izmir University of Economics.

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Lecture3 - Coordination, Cooperation and Conflict...

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