Uncertainty, Optimal Specialization and Growth

LEM Working Paper Series No. 2006/05

24 Pages Posted: 24 Jul 2007

See all articles by Michele Di Maio

Michele Di Maio

Sapienza University of Rome

Marco Valente

University of L'Aquila - Faculty of Economics

Date Written: February 2006

Abstract

We present a novel argument demonstrating that when trade is characterized by uncertainty the comparative advantages doctrine is misleading and a positive level of diversification is growth enhancing. Applying a result developed in the mathematical biological literature, we show that, in Ricardian trade model in which capital available for investment depends on previous periods returns, incomplete specialization is optimal. We also demonstrate that, in this case, the decentralized solution is characterized by an inefficiently high level of specialization with respect to the social optimal one. Finally, we present a taxation scheme that, reconciling individual incentives and social optimum, is able to induce individual agents to adopt the optimal specialization strategy, i.e. the one that maximizes the country growth rate.

Keywords: uncertainty, specialization, growth, government

JEL Classification: F19, O49, D80, H20

Suggested Citation

Di Maio, Michele and Valente, Marco, Uncertainty, Optimal Specialization and Growth (February 2006). LEM Working Paper Series No. 2006/05, Available at SSRN: https://ssrn.com/abstract=1002596 or http://dx.doi.org/10.2139/ssrn.1002596

Michele Di Maio (Contact Author)

Sapienza University of Rome ( email )

via del Castro Laurenziano 9
Rome
Italy

HOME PAGE: http://https://sites.google.com/a/uniroma1.it/micheledimaio/home

Marco Valente

University of L'Aquila - Faculty of Economics ( email )

Piazza del Santuario, 19
Roio Poggio, AQ, 67040
Italy

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