Consequences of imitation by poor countries on international wage inequalities and global growth

Abstract

This paper presents an endogenous growth model where the level of international transaction costs may be decisive for whether the poor East specializes in agriculture production, imitates goods from the rich West, or makes its own innovations. We show that the East produces only agricultural goods if transaction costs are high, while innovation is profitable when transaction costs are low. In between we have a range of transaction costs where the East imitates, possibly resulting in a lower global growth rate and a larger international wage gap than if imitation were not possible.