2006/05 | LEM Working Paper Series | |
Uncertainty, Optimal Specialization and Growth |
||
Michele Di Maio, Marco Valente |
||
Keywords | ||
Uncertainty, Specialization, Growth, Government.
|
||
JEL Classifications | ||
F19, O49, D80, H20.
|
||
Abstract | ||
We present a novel argument demonstrating that when trade is characterized by
uncertainty the comparative advantages doctrine is misleading and a positive level of
diversification is growth enhancing. Applying a result developed in the mathematical
biological literature, we show that, in a Ricardian trade model in which capital available for investment depends on previous periods returns, incomplete specialization is
optimal. We also demonstrate that, in this case, the decentralized solution is characterized by an inefficiently high level of specialization with respect to the social optimal
one. Finally, we present a taxation scheme that, reconciling individual incentives and
social optimum, is able to induce individual agents to adopt the optimal specialization
strategy, i.e. the one that maximizes the country growth rate.
|
||
Downloads | ||
|
||
Back |