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I am grateful to Jasmina Arifovic for discussing the issues with me at an early stage of the project, to Oded Galor, Carol Graham, Ken Kletzer, Antonio Spilimbergo, Erik Thorbecke, Robert Townsend, and Kenichi Ueda for commenting on an earlier draft, and to Saji Thomas for research assistance.
Lloyd-Ellis and Bernhardt (2000) develop a model in which agents differ in their entrepreneurial skills, and where becoming an entrepreneur requires making a minimum investment. They relate the evolution of wealth distributions to stages of development.
Urbanization per se needs to be distinguished from the creation of megacities. Ades and Glaeser (1995) show that the latter are likely to be associated with dictatorships and political instability, and to be negatively correlated with the extent of international trade.
Of course, agriculture also involves human capital formation and learning of new techniques, as stressed by the work of Theodore Schultze (e.g. Schultze, 1964).
A more disaggregated framework, termed a “dual-dual” model (Thorbecke, 1997), would also differentiate rural agricultural production between a modern sector and an informal, traditional sector.
But these externsions quickly make the model difficult if not impossible to solve analytically, making use of simulation techniques necessary.
If ability is very low, hi is so high that investment in skills is never undertaken because the agricultural wage is greater than the expected return from human capital, wa > – hi (1+r)+ws. In this case, only the agricultural dynamics apply.
As before, the initial wealth distribution has negligible effects on the ultimate distribution, because even agricultural workers become wealthy enough to acquire urban skills if they desire to do so. They remain rural workers in equilibrium because for them the expected return for investment is below the agricultural wage.
Galor and Moav (2000) argue that physical capital accumulation is a dominant factor in the initial stages of development, human capital in later stages