Building blocks for barriers to riches

Building blocks for barriers to riches

by Narayana Rao Kocherlakota

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Total factor productivity (TFP) differs greatly across countries.In this paper, I provide a novel rationalization for these differences.I consider two environments, one in which enforcement is full and the other in which enforcement is limited.In both settings, manufactured goods can be produced using a high-TFP technology or a low-TFP technology; there is a fixed cost associated with adoption of the former.I suppose that the fixed cost is sufficiently small that adoption takes place in a symmetric Pareto optimum in the limited-enforcement setting.Under this condition, I prove two results.First, adoption takes place in all Pareto optima in the full-enforcement setting.Second, adoption may not take place in a Pareto optimum in the limited-enforcement setting, if the division of social surplus is sufficiently unequal.I conclude that limited enforcement and high inequality interact to create particularly strong barriers to riches - in the language of Parente and Prescott (1999, 2000)--Federal Reserve Bank of Minneapolis web site.

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