DP1110 Unemployment, Investment and Sectoral Reallocation

Author(s): Bankim Chadha, Fabrizio Coricelli
Publication Date: January 1995
Keyword(s): Development, Investment, Restructuring, Unemployment
JEL(s): E2, O1, P5
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1110

This paper presents a model of development of an economy comprised of a rural-agricultural sector and an urban-industrial sector. The interaction of investment with unemployment creates a channel for potentially divergent long-run outcomes. If the urban-industrial capital stock falls short of a threshold level, the urban-industrial sector will not develop. If the capital stock is high enough, there is a unique path by which it will develop. Between these two extremes is a region of indeterminacy where expectations can play a pivotal role in determining the long-run outcome.