Contents

Abstract 474

Keywords 474

1. Introduction: neo-classical growth theory 475

1.1. The aggregate production function 475

1.2. The logic of convergence 477

2. Rates of return and investment rates in poor countries 479

2.1.

2.1.1. Physical capital 479

2.1.2. Humancapital 484

2.1.3. Taking stock: returns on capital 491

2.2. Investment rates in poor countries 493

2.2.1. Is investment higher in poor countries? 493

2.2.2. Does investment respond to rates of return? 495

2.2.3. Taking stock: investment rates 499

3. Understanding rates of return and investment rates in poor countries: aggrega­tive approaches 499

3.1. Access to technology and the productivity gap 499

3.2. Humancapitalexternalities 501

3.3. Coordination failure 503

3.4. Taking stock 504

4. Understanding rates of return and investment rates in poor countries: non-

aggregative approaches 505

4.1. Government failure 505

4.1.1. Excessive intervention 507

4.1.2. Lack of appropriate regulations: property rights and legal enforcement 508

4.2. The role of credit constraints 509

4.3. Problems in the insurance markets 512

4.4. Local externalities 515

Handbook of Economic Growth, Volume 1A. Edited by Philippe Aghion and Steven N. Durlauf

© 2005 Elsevier B.V. All rights reserved

DOI: 10.1016∕S1574-0684(05)01007-5

4.5. The family: incomplete contracts within and across generations 518

4.6. Behavioral issues 520

5. Calibrating the impact of the misallocation of capital 522

5.1. Amodelwithdiminishingreturns 523

5.2. Amodelwithfixedcosts 527

5.2.1. Takingstock 534

6. Towards a non-aggregative growth theory 535

6.1. An illustration 535

6.2. Can we take this model to the data? 538

6.2.1. What are the empirical implications of the above model? 538

6.2.2. Empirical evidence 541

6.3. Where do we go from here? 542

Acknowledgements 544

References 544