References and Literature

By its nature, this chapter has covered a large amount of material. My selection of topics and approaches corresponding to these topics has reflected my own interests and was also motivated by my desire to keep this chapter from becoming even longer than it already is.

Section 21.1 scratches the surface of a rich literature on financial development and eco­nomic growth. On the theoretical side important papers include Townsend (1979), Green­wood and Jovanovic (1990), Bencivenga and Smith (1991), which focus on the interaction between financial development on the one hand and risk sharing and the allocation of funds across different tasks and individuals on the other. Obstfeld (1994), Saint-Paul (1992) and Acemoglu and Zilibotti (1997), which was discussed in Section 17.6, focus on the relationship between financial development and the diversification of risks. There is also a large empirical 913

literature looking at the effect of financial development on economic growth. An excellent survey of this literature is provided in Levine (2005). Some of the most well-known empirical papers include King and Levine (1993), which documents the cross-country correlation be­tween measures of financial development and economic growth, Rajan and Zingales (1998), which shows that lack of financial development has particularly pernicious effects on sectors that have a greater external borrowing needs, and Jayaratne and Strahan (1996), which doc­uments how banking deregulation that lead to greater competition in US financial markets lead to more rapid financial and economic growth within the United States. In discussing financial development, I also mentioned the literature on the Kuznets curve.

The literature on economic growth and fertility and on the demographic transition is even larger than the literature on financial development. The main trends in world popula­tion and cross-country differences in population growth are summarized in Livi-Bacci (1997) and Maddison (2003). The idea that parents face a tradeoff between the numbers and the human capital of their children—i.e., the quality and quantity tradeoff—was proposed by Becker (1981). The aggregate patterns in Livi-Bacci (1997) are consistent with this idea, though there is little micro evidence supporting this tradeoff. Recent work on microdata by Black, Devereux and Salvanes (2005), Angrist, Lavy and Schlosser (2006), and Qian (2007) looks at evidence from Norway, Israel and China, but does not find support for the quality­quantity tradeoff. Fertility choices were first introduced into growth models by Becker and Barro (1988) and Barro and Becker (1989). Becker, Murphy and Tamura (1990) provide the first endogenous growth model with fertility choice. More recent work on the demo­graphic transition and the transition from a Malthusian regime to one of sustained growth include Goodfriend and McDermott (1995), Galor and Weil (1996, 1999, 2000), Hansen and Prescott (2002), Tamura (2002), Lagerlof (2003), and Doepke (2004). Kalemli-Ozcan (2002) and Villaverde (2003) focus on the effect of declining mortality on fertility choices in a growth context. A recent series of papers by Galor and Moav (2002, 2004) combine fertility choice, quality-quantity tradeoff and natural selection. Galor (2005) provides an excellent overview of this literature.

Urbanization is another major aspect of the process of economic development. Bairoch (1988) provides an overview of the history of urbanization and and insightful discussion of some of the economic literature in this area. The first model in Section 21.3 builds on Arthur Lewis’s (1954) classic, which argued that early development can be viewed as a situation in which there is surplus labor available to the modern technology, thus growth is constrained by capital and technology but not by labor. A formalization of Lewis’s ideas naturally takes us to the realm of the dual economy, since surplus labor for the modern technology can remain only when there is limited interaction between the modern technology (cities) and rural areas. Another well-known model by Harris and Todaro (1970) also emphasize the importance of model of migration, though it features free migration between rural and urban areas and suggests that unemployment in urban areas will be the key equilibriatingvariable.

The second model, presented in subsection 21.3.2, is inspired by Banerjee and Newman (1998) and Acemoglu and Zilibotti (1999). Banerjee and Newman emphasize the advan­tage of smaller rural communities in reducing moral hazard problems in credit relations and show how this interacts with the process of urbanization, which involves individuals migrat­ing to areas where they are marginal product is higher. Acemoglu and Zilibotti argue that development—capital accumulation—leads to “information accumulation,” in particular, as more individuals perform similar tasks, more socially useful information is revealed and rel­ative performance of valuations can be used more effectively to filter out common shocks. They show that greater information enables individuals to write more sophisticated con­tracts and draw the implications of these more complex contractual relations on technology choice, financial development and social transformations associated with economic develop­ment.

Section 21.4 builds on Acemoglu, Aghion and Zilibotti (2004, 2006). Evidence consistent with organizational changes related to the distance to the frontier are provided in Acemoglu, Aghion, Lelarge, Van Reenen and Zilibotti (2007).

Section 21.5 is based on Murphy, Shleifer and Vishny’s famous (1989) paper, which for­malizes ideas first proposed by Rosenstein-Rodan (1943). Other models that demonstrate the possibility of multiple equilibria in monopolistic competition models featuring nonconvexities include Kiyotaki (1988), who derives a similar result in a model with endogenous labor supply choices as well as investment decisions. Matsuyama (1996) provides an excellent overview of these models, as well as other approaches that can lead to multiple equilibria in multiples the

states. Matsuyama (1996) also provides a very clear discussion of why pecuniary externalities can lead to multiple equilibria in the presence of monopolistic competition.

The distinction between multiple equilibria and multiple steady states is discussed in Krugman (1994) and Matsuyama (1994). Both of these papers highlight that in models with multiple equilibria, expectations determine which equilibrium will be played, while with multiple steady states, there can be (or there often is) a unique equilibrium and initial conditions (history) determines where the economy will end up.

Section 21.6 covers the enormous literature on the role of inequality in human capi­tal investments and occupational choices. The model in subsection 21.6.2 is based on the first model in Galor and Zeira’s well-known (1993) paper. Similar ideas are investigated in Banerjee and Newman (1994) in the context of the effect of inequality on occupational choice, and Aghion and Bolton (1998) and Piketty (1998) in the context of the interaction between inequality and entrepreneurial investments. The model in subsection 21.6.3 is based on Benabou (1996a,b), which investigates the dynamics of inequality, how inequality affects productive efficiency and the implications of different forms of community structures. Other papers that investigate similar questions include Loury (1981), Tamura (1991, 2001), Durlauf (1996), Fernandez and Rogerson (1996, 1998), Glomm and Ravikumar (1992), and Acemoglu (1997). An excellent survey of this set of papers, together with extensions to analyze the interaction between political economy and inequality and between endogenous technology choices and inequality is contained in Benabou (2005). There is also a large literature on inequality, human capital and taxation that incorporates political economy features. This literature will be discussed in the next chapter.

21.10.