Technology Choice, Externalities in Production, and a Chaotic Middle-Income Trap

Abstract

We incorporate the external effects of capital in production and endogenous technology choice into the standard overlapping generations model. We demonstrate that our model can exhibit a poverty trap, a middle-income trap, and perpetual growth paths. We also show that, under some economic conditions, an economy exhibits all three of these phenomena, depending on its initial capital level, and that 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.