Evolutionary Dynamics of Poverty Traps

Standard growth theory teaches us that poverty traps are stable-low level balanced growth paths to which economies gravitate due to adverse initial conditions or poor equilibrium selection. In other words, societies fail to take off into sustained growth because they started poor, or because they cannot create institutions that coordinate their investments successfully. This paper explains this pernicious form of coordination failure as an evolutionary game between firms and workers. Rates of return of innovative firms depend on average skilled workers, and rates of return on skilled workers depend on aggregate innovative firms' investments. So, in poor economies with a large fraction of unskilled workers or non-innovative firms, imitative strategies do not support a take-off into sustained growth. To achieve that take-off, the society should subsidize the cost of education and/or skill premia through a tax system on income until the economy builds a critical mass of high-profile economic agents.