In the presence of uncertainty about what a country can be good at producing, there can be great social value to discovering costs of domestic activities because such discoveries can be easily imitated. We develop a general-equilibrium framework for a small open economy to clarify the analytical and normative issues. We highlight two failures of the laissez-faire outcome: there is too little investment and entrepreneurship ex ante, and too much production diversification ex post. Optimal policy consists of counteracting these distortions: to encourage investments in the modern sector ex ante, but to rationalize production ex post. We provide some informal evidence on the building blocks of our model. © 2003 Elsevier B.V. All rights reserved.
CITATION STYLE
Hausmann, R., & Rodrik, D. (2003). Economic development as self-discovery. Journal of Development Economics, 72(2), 603–633. https://doi.org/10.1016/S0304-3878(03)00124-X
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