BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
Endogenous time preference, investment and development traps
() and Mikko Puhakka
Abstract: We introduce endogenous time preference via investment in
patience (farsightedness) in an overlapping generations growth model to
study development traps. There is no investment in patience, if the economy
is very poor, while if it is wealthy enough there is always such
investment. We explore the conditions for the existence of the development
trap, and study in detail a robust example of an economy with traps. It
does not exist, if the economy's total factor productivity is large enough.
Our results illustrate the complementarity between physical investment and
investment in farsightedness. Our model may also explain why economic
growth is affected by initial conditions. In addition we show that
increased international capital mobility does not necessarily help
economies to escape from development traps.
Keywords: development trap; overlapping generations; (follow links to similar papers)
JEL-Codes: I30; O11; O16; (follow links to similar papers)
30 pages, March 5, 2004
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