Assignment # 3 dated Feb 13, 2004 and due on Feb 27, 2004. Before you proceed with
the assignment, please check the details for submission of assignments on the course
website under Assignments.
Short Essay Questions:
Please provide a short answer (10-12 lines of 12 point Times New Roman Font) to the
Question: Compare and contrast the Big Push Theory and Kremer’s O-Ring Theory.
Comparison: (two of three points should be mentioned) 2.5 marks
1. Explains multiple equilibria and coordination failures. Big push- under
development because of failure to initiate industrialization in a subsistence
economy. O-ring- low level equilibrium traps and poverty traps using
coordination failures in firm level production functions.
2. List out conditions of multiple-equilibria. Big push explains intertemporal
effects, urbanization effects---O-ring- low- production- quality traps, choice
of technology, brain drain.
3. Advocate importance of govt policy. Big push- infrastructure is important,
super entrepreneur fails to push the economy. O-ring- open trade policy is
Contrast: (Both points should be mentioned) 2.5 marks
1. Models used are different. Big-push uses modern and traditional production functions
and shows that multiple equilibria occur at the point where wage bill passes
between point of industrialization and one without industrialization.
Important point is that in the presence of coordination failures the market on
its own cannot move to the point of industrialization. O-ring uses firm level
PF and emphasizes complementarity between inputs. Positive assortative
matching between different quality workers determines the quality of the final
2. Big push states that small distortions in the decisions of an individual
add up to large distortions resulting in failure to industrialize. O-ring
talks about how production bottlenecks can spread across sectors thus pushing
an economy into low-level equilibrium traps.