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Rational Underdevelopment *
Author(s) -
Desmet Klaus,
Ortuño Ortín Ignacio
Publication year - 2007
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/j.1467-9442.2007.00478.x
Subject(s) - underdevelopment , lagging , economics , technological change , macroeconomics , economic growth , medicine , pathology
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.