Berkeley Macro Seminar: October 19, 2006

Chad Jones (2006), "The Weakest Link Theory of Economic Development":

Per capita income in the richest countries of the world exceeds that in the poorest countries by more than a factor of fifty. What explains these enormous differences? This paper returns to two old ideas in development economics--complementarity and linkages:

1. Just as a chain is only as strong as its weakest link, problems at any point in a production chain can reduce output substantially if inputs enter production in a complementary fashion.
2. Linkages between firms through intermediate goods deliver a multiplier similar to the one associated with capital accumulation in the neoclassical growth model. Because the intermediate goods' share of of revenue is about 1/2, this multiplier is substantial.

The paper builds a model with complementary inputs and links across sectors, and shows that it can easily generate fifty-fold aggregate income differences [without leaving visible $1,000 bills on the sidewalk].