Why the problem cannot be solved by a super

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Why the Problem cannot Be Solved by a Super-EntrepreneurHigh agency (monitoring etc) costsLimits to knowledgeCommunication failures (what if many try to coordinate?)Capital market failures (how would lenders have confidence in their investments)Further Problems of Multiple EquilibriaInefficient Advantage of Incumbency:oDue to increasing returns to scale in the modern sector, an existing firm with high output and customer base has low average output. Therefore it may have an advantage over new firms using more-efficient technology, causing the economy to be stuck in less cost-effective industries.Behaviour and Norms:oIt is difficult to change new behaviours into norms and so move to a new equilibrium (eg. one of cooperation as opposed to corruption)Linkages:oOne strategy for solving coorindation is to increase the linkages between sectors so that development of one sector assists the development of other sectors.oThe private sector will focus on more profitable industries but the government may need to select sectors that have a smaller likelihood of private-sector investmentInequality, multiple equilibria, and growth:oIncreasing returns plays a key role in generating multiple equilibriaoEmpirically, many studies have found a negative impact of inequality on growth as poor people save at much higher rates than previously believed (even though the rich
have higher marginal propensity to save), and may not be able to obtain loans because they lack collateral.Kremer’s O-Ring Theory of Economic DevelopmentO-ring model (Michael Kremerin 1993)oProvides valuable insights into the impact of complementarities across firms of sectors of an underdeveloped economyoBased on the notion that modern production requires that many activities be done well together in order for any of them to amount to high value – Even a small part has a big role to play and should not be ignoredoO-ring production function given by:BF(qiqj) = qiqj(Size of B depends on number of tasks – more tasks, higher B)oPositive associative matchingin production:In developing countries lots of unskilled labourSkilled labour more complementary with skilled labour than unskilled labourThis means that workers with high skills will work together and workers with low skills will work together (because your efforts are multiplied by those of someone else, as equation shows)Because total value (output) is higher when skill matching takes place, the firm (or economy) that starts with high-productivity workers can afford to bid more to get additional high-productivity workers.oAssumptions:Workers must be sufficiently imperfect substitutesWe must have sufficient complementarity of tasksImplications of the O-Ring Theory:oFirms tend to emplou workers with similar skills for their several tasksoWorkers performing the same task earn higher wages in a high-skill firm than in a low-skill firmoWages will be more than proportionally higher in developed countries than would be predicted from standards measures of skill (multiplied effect)oWhen those around you have higher skills, you have a greater incentive to acquire more skillsoOne can get caught in economywide low-production-quality trapso

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