DP1110 | Unemployment, Investment and Sectoral Reallocation

Publication Date

31/01/1995

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Abstract

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.