Essays in the theory of economic growth

Abstract

This thesis is a collection of three theoretical essays on institutions and economic growth. Chapter 1 considers a particular institution: ethnicity. Ethnic, religious and tribal divisions are empirically associated with economic underdevelopment. I construct a model in which groups form endogenously to enable cooperation between their members in a prisoner's dilemma. Groups sustain trust through monitoring, whereas only the Nash equilibrium, trade, is possible in an anonymous market. Optimal group size trades off the benefits of increased scale and the costs of reduced ability to detect cheating. Inter-group hostility can enable each group to enforce more trusting behavior between its own members. Even if groups may form optimally, in equilibrium they may persist inefficiently. Chapters 2 and 3 consider some distributional implications of technical change in a model with human capital. Both chapters distinguish between general skills, that are equally useful with any vintage of technology, and specific skills, that are associated with a particular vintage. In Chapter 2, I construct a model of slow technology diffusion. In developing countries, diffusion takes the form of a "dual economy", in which a gradually increasing fraction of workers use modern technology, while the remainder use traditional technology. Intermediate technologies are never used. During the transition, wages of specific-skill workers fall, as workers with general skills disproportionately join the modern sector. The model can also be applied to technology diffusion in developed countries. Chapter 3 asks why, early in the modern era, technical change was primarily deskilling, while in the modern era it is skill-biased.

(cont.) Whereas previous explanations have focused on changes in technology, this paper suggests that changes in skills themselves were important. High-skill workers invest in specific skills if technical change is slow, and in general skills if it is rapid. This generates a U-shaped relationship between the rate of technical change and the skill-premium. Moreover, with low rates of technical change the modern sector is unskill-intensive, whereas the reverse is true when technical change is faster. The predictions of the model are compared with the historical experience.