Michael Kremer (1993) The O-Ring Theory of Economic Devel...

Michael Kremer (1993) The O-Ring Theory of Economic Development http://www.jstor.org/stable/2118400: "People in business talk about quality all the time.... This paper makes a stab at modeling quality... proposes an O-ring production function in which quantity cannot be substituted for quality.... Under this production function, small differences in worker skill lead to large differences in wages and output...

...If tasks are performed sequentially, high-skill workers will be allocated to later stages of production. Poor countries will therefore have higher shares of primary production in GNP, and workers will be paid more in industries with high value inputs.... Imperfect matching of workers due to imperfect information about worker skill leads to positive spillovers and strategic complementarity in investment in human capital. Thus, subsidies to investment in human capital may be Pareto optimal. Small differences between countries in such subsidies or in exogenous factors such as geography or the quality of the educational system lead to multiplier effects that create large differences in worker skill. If strategic complementarity is sufficiently strong, microeconomically identical nations or groups within nations could settle into equilibria with different levels of human capital...

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