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Endogenous time preference, investment and development traps

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  • Haaparanta, Pertti
  • Puhakka, Mikko

Abstract

We introduce endogenous time preference via investment in patience (farsightedness) in an overlapping generations growth model to study development traps.There is no investment in patience, if the economy is very poor, while if it is wealthy enough there is always such investment.We explore the conditions for the existence of the development trap, and study in detail a robust example of an economy with traps.It does not exist, if the economy's total factor productivity is large enough.Our results illustrate the complementarity between physical investment and investment in farsightedness.Our model may also explain why economic growth is affected by initial conditions.In addition we show that increased international capital mobility does not necessarily help economies to escape from development traps.

Suggested Citation

  • Haaparanta, Pertti & Puhakka, Mikko, 2004. "Endogenous time preference, investment and development traps," BOFIT Discussion Papers 4/2004, Bank of Finland Institute for Emerging Economies (BOFIT).
    • Handle: RePEc:zbw:bofitp:bdp2004_004
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    References listed on IDEAS

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    More about this item

    Keywords

    development trap; overlapping generations;

    JEL classification:

    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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