Co-ordination failure - corruption in government
“The governments of many developing countries are sometimes part of the problem of coordination failures.” Explain and discuss.
Word count: 997
In this essay I will explain what is meant by coordination failures and how these might arise and subsequently persist. It will then be shown how governments can attempt to overcome these using policies however this is not always successful as governments sometimes cause the problem to persist.
A coordination failure is when economic agents do not properly coordinate their choice which then leads to an equilibrium outcome that leaves agents worse off. The alternative situation would be a more optimal equilibrium outcome however since agents do not coordinate their behaviour, they settle at the suboptimal equilibrium. It may be the case that agents are aware of the preferred equilibrium but there are difficulties reaching this because of coordination. Adam Smith said “The division of labour is limited by the extent of the market, the extent of the market is also limited by the division of labour”, markets are highly interdependent therefore highlighting the way coordination failures can keep developing economies in the poverty trap.
An example would be with primary and secondary education in poor countries. If parents expect their neighbours to choose primary education rather than secondary, they will also choose primary education for their children. In this situation it would be more beneficial to individual families and to society for families to choose secondary education however there is short termism present here because parents want their children to be educated but the longer the child is in education the less time they are economically helpful. There are complementarities involved where there are coordination failures whereby decisions often involve investments whose return depends upon investments being made by other economic agents.
Multiple Equilibria
The following diagram illustrates the multiple equilibria
Word count: 997
In this essay I will explain what is meant by coordination failures and how these might arise and subsequently persist. It will then be shown how governments can attempt to overcome these using policies however this is not always successful as governments sometimes cause the problem to persist.
A coordination failure is when economic agents do not properly coordinate their choice which then leads to an equilibrium outcome that leaves agents worse off. The alternative situation would be a more optimal equilibrium outcome however since agents do not coordinate their behaviour, they settle at the suboptimal equilibrium. It may be the case that agents are aware of the preferred equilibrium but there are difficulties reaching this because of coordination. Adam Smith said “The division of labour is limited by the extent of the market, the extent of the market is also limited by the division of labour”, markets are highly interdependent therefore highlighting the way coordination failures can keep developing economies in the poverty trap.
An example would be with primary and secondary education in poor countries. If parents expect their neighbours to choose primary education rather than secondary, they will also choose primary education for their children. In this situation it would be more beneficial to individual families and to society for families to choose secondary education however there is short termism present here because parents want their children to be educated but the longer the child is in education the less time they are economically helpful. There are complementarities involved where there are coordination failures whereby decisions often involve investments whose return depends upon investments being made by other economic agents.
Multiple Equilibria
The following diagram illustrates the multiple equilibria
References: Reading 1: Contemporary models of development and underdevelopment Figure 1: Multiple equilibria diagram, page 163, Figure 4.1 Italics 1 – Extract from reading, defining equilibrium Reading 2: Diagnostics before prescription Dani Rodrik http://economics.mit.edu/files/3908 - The Choice Between Market Failures and Corruption Daron Acemoglu and Thierry Verdier http://mpra.ub.uni-muenchen.de/5757/1/MPRA_paper_5757.pdf - Coordination Failures, Poverty Traps, “Big Push” policy and Entrepreneurship: A Critical View Bogdan Glavan