Start-up costs and pecuniary externalities as barriers to economic development

Antonio Ciccone*, Kiminori Matsuyama

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

93 Scopus citations

Abstract

We use a dynamic monopolistic competition model to show that an economy that inherits a small range of specialized inputs can be trapped into a lower stage of development. The limited availability of specialized inputs forces the final goods producers to use a labor intensive technology, which in turn implies a small inducement to introduce new intermediate inputs. The start-up costs, which make the intermediate inputs producers subject to dynamic increasing returns, and pecuniary externalities that result from the factor substitution in the final goods sector, play essential roles in the model.

Original languageEnglish (US)
Pages (from-to)33-59
Number of pages27
JournalJournal of Development Economics
Volume49
Issue number1
DOIs
StatePublished - Apr 1996

Keywords

  • Development traps
  • Increasing returns due to specialization
  • Monopolistic competition
  • Roundabout production
  • The Hicks-Allen complementarity

ASJC Scopus subject areas

  • Development
  • Economics and Econometrics

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