Lecture+6 (1) - Grand Theories of Economic Development...

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Click to edit Master subtitle style 5/10/10 Grand Theories of Economic Development: Second Lecture
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5/10/10 The O-Ring Model The 1986 Challenger disaster was caused by the failure of a simple, inexpensive part (the O-ring) On this view, using low-skill workers is dangerous, because they can destroy the value produced by others Not possible to replace a high-skill worker by several low-skill workers
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5/10/10 Production Functions and Worker Quality: Standard Some workers are more skilled than others. For simplicity, say there are two skill levels: qH and qL . The standard model supposes decreasing returns to using more workers of a given type. E.g., managers ( qH ) and production workers ( qL )
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5/10/10 Production Functions and Worker Quality: Standard If developing economies have few high-skill workers, then the standard model implies that their marginal product is very high. The highly skilled do best when they can pair with many low-skill workers. In fact, we often observe the highly skilled clustering together (e.g., Silicon Valley)…. .
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5/10/10 Production Functions and Worker Quality: O-Rings An alternative model of production: Fixed set of tasks to be done (say 2 tasks, i and j ) in each “production unit.” Total value of output is F(qi,qj) = qiqj A firm’s choices: Hire two high-skill workers Hire two low-skill workers Hire one of each
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5/10/10 Production Functions and Worker Quality: O-Rings Say qH = 0.8 and qL = 0.4. Firm A has already hired one qH worker. Hire a 2nd qH worker: output = 0.64. Hire a qL worker: output = 0.32. Firm A is willing to pay a premium of up to 0.64 – 0.32 = 0.32 for a high-skill worker.
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5/10/10 Production Functions and Worker Quality: O-Rings We can also say something about relative wages in an O-ring economy: Suppose free entry drives profits to 0. Then a high-skill firm produces (0.8)(0.8)
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This note was uploaded on 05/02/2010 for the course ECON Econ 311 taught by Professor Schnabl during the Spring '10 term at University of Delaware.

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Lecture+6 (1) - Grand Theories of Economic Development...

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