From Tradition to Modernity: Economic Growth in a Small World

I.D. Lindner, H. Strulik

    Research output: Contribution to JournalArticleAcademicpeer-review

    Abstract

    This paper introduces the Small World model into the theory of economic growth and investigates how increasing economic integration affects firm size and efficiency, norm enforcement, and aggregate economic performance. When economic integration is low and local connectivity is high, informal norms control entrepreneurial behavior and more integration mainly improves search for investment opportunities. At a higher level of economic integration neighborhood enforcement deteriorates and formal institutions are needed to keep entrepreneurs in check. A gradual take-off to perpetual growth is explained by a feedback effect from investment to the formation of long-distance links and the diffusion of knowledge. If formal institutions are weak, however, the economy does not take off but stagnates at an intermediate income level. Structurally, the equilibrium of stagnation differs from balanced growth by the presence of many small firms with low productivity. © 2014 Elsevier B.V.
    Original languageEnglish
    Pages (from-to)17-29
    JournalJournal of Development Economics
    Volume109
    Issue numberJuly
    DOIs
    Publication statusPublished - 2014

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