Markets and Development
NBER Working Paper No. 2961 (Also Reprint No. r1339)
This paper explores the causes and consequences of the more important market failures which impede the development of LOCs, and explains why the non-market institutions which often ameliorate the effects of market failures in developed countries are less effective- in doing so in LOCs. This paper focuses, in particular, on those market failures which arise from imperfect information (as in the capital market) or which are almost inevitably associated with the learning which must occur if the less developed countries are successfully to make the transition to being more developed. learning, Among the consequences of learning-by-doing, of localized and of learning-to-learn are imperfections of competition, multiple equilibria, hysteresis, and the optimality of non-myopic policies. These market failures are markedly different from those that were the center of attention in earlier literature, which led to arguments for government planning. Government interventions need to recognize the source of market failures; informational problems affect the government no less than the private sector. In some cases, interventions should be directed at making markets work more effectively; in other cases, the government may take a role in establishing non-market institutions to ameliorate the effects of market failure.
Published: "Markets, Market Failures, and Development" From The American Economic Review, Vol. 79, No. 2, pp. 197-203, (May 1989).