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Culture and Stages of Economic Development

Chu, Angus C. and Kou, Zonglai and Wang, Xilin (2021): Culture and Stages of Economic Development. Forthcoming in: Economics Letters

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How do cultural differences in preferences affect economic development? This study develops a simple growth model that features two stages of development. In the first stage, economic growth is driven by human capital accumulation. In the second stage, economic growth is driven by innovation. The economy does not necessarily experience the transition from the first stage to the second stage. If this endogenous transition does not occur, the economy converges to a steady-state level of output. The economy may remain in this middle-income trap under different conditions. Surprisingly, parental preference for education being too strong is among one of them. This result formalizes a potential explanation for why the Industrial Revolution did not happen in China.

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