Kessler, Z. B. An Agentization of the O-Ring Theory of Development: Issues with Endogenous Skill Matching.
Kessler, Zachary B. “An Agentization of the O-Ring Theory of Development: Issues with Endogenous Skill Matching” (n.d.).
Kessler, Zachary B. An Agentization of the O-Ring Theory of Development: Issues with Endogenous Skill Matching.
Kremer’s O-Ring Theory of Development (1993) represents an important effort to explain a collection of stylized facts from the economic development literature, most critically the large skill disparities between countries. This paper tests the theory by utilizing an agent- based model to add endogenous choice to workers’ behavior and examines the robustness of its results, determining if a collection of agents can sort themselves into the predicted equilibrium under a variety of circumstances. The agent-based approach reveals that in a world where countries possess a heterogenous number of tasks in their respective production functions, the skill matching in Kremer’s model cannot be reached. Instead, workers sort into a Nash equilibrium rather than the efficient outcome. Further, this result is shown to be robust to changes in the production function and requires additional intervention to recover the efficient outcome.