Rational Underdevelopment

24 Pages Posted: 1 Jun 2007

See all articles by Klaus Desmet

Klaus Desmet

Southern Methodist University (SMU); Centre for Economic Policy Research (CEPR)

Ignacio Ortuño Ortín

University of Alicante - Department of Economic Analysis

Abstract

We propose a two-region two-sector model of uneven development, where technological change benefits either the lagging or the leading region. In this framework interregional transfers may lead to persistent underdevelopment; by raising wages, transfers reduce the chance of the backward region adopting a new technology and taking off. Due to uncertainty about which region benefits from technological change, the backward region may rationally choose to remain underdeveloped, while the advanced region continues to pay transfers. The model provides a rationale for cases, such as Italy's Mezzogiorno, where the same rich region subsidizes the same poor region on a continuous basis.

Suggested Citation

Desmet, Klaus and Ortuño Ortín, Ignacio, Rational Underdevelopment. Scandinavian Journal of Economics, Vol. 109, No. 1, pp. 1-24, March 2007. Available at SSRN: https://ssrn.com/abstract=990125 or http://dx.doi.org/10.1111/j.1467-9442.2007.00478.x

Klaus Desmet (Contact Author)

Southern Methodist University (SMU) ( email )

6212 Bishop Blvd.
Dallas, TX 75275
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ignacio Ortuño Ortín

University of Alicante - Department of Economic Analysis ( email )

03080 Alicante
Spain
+34 96 590 3400 (Phone)
+34 96 590 3898 (Fax)

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