Technology Choice, Externalities in Production, and Chaotic Middle-Income Traps

Abstract

We incorporate external effects of capital on production and endogenous technology choice into the standard overlapping generations model. We demonstrate that our model can exhibit poverty traps, middle-income traps, and perpetual growth paths. We also show that these three phenomena coexist for some set of parameters and the economy caught in the middle-income trap can exhibit chaotic fluctuations in the long run. In obtaining these results in the standard overlapping generations model, the combination of technology choice and externalities in production plays a crucial role.