We study a model of economic growth and development with a threshold externality. The model has one steady state with a low and stagnant level of income per capita and another steady state with a high and growing level of income per capita. Both of these steady states are locally stable under the perfect foresight assumption. We introduce learning into this environment. Learning acts as an equilibrium selection criterion and provides an interesting transition dynamic between steady states. We find that for sufficiently low initial values of human capital-values that would tend to characterize preindustrial economies-the system under learning spends a long period of time (an epoch) in the neighborhood of the low income steady state before finally transitioning to a neighborhood of the high income steady state. We urge that this type of transition dynamic provides a good characterization of the economic growth and development patterns that have been observed across countries.
https://doi.org/10.20955/wp.1995.017
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