Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/87268
Authors: 
Lindner, Ines
Strulik, Holger
Year of Publication: 
2012
Series/Report no.: 
Tinbergen Institute Discussion Paper 12-035/1
Abstract: 
This paper introduces the Small World model (Watts and Strogatz, Nature, 1998) 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 efficient 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 relatively many small firms of low productivity.
Subjects: 
modernization
economic integration
firm size
norms
networks
knowledge spillovers
growth
JEL: 
O10
O40
L10
L14
Z13
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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