Abstract
A growth model is developed to explain how the economic convergence interacts with the endogenous institutional reform. Learning externality generates economic convergence until a bottleneck is reached, at which point convergence stops unless the institution is improved. This non-stationary dynamic problem is characterized recursively.
It is shown analytically that the convergence is incessant for a …nite period until the last learning constraint binds, after which the developed and developing economies have the same growth rate. Beneath the catching up process, institutions are improved for a …nite number of times, each occurring precisely when the learning constraint just becomes binding. The adjustment size is strictly monotonic or constant over time when the …xed adjustment cost is negligible. Implications for the optimal economic reforms are discussed with empirical evidence.
Key Words: Learning Externality, Institutions, Convergence, Growth, Optimal
Reform
JEL Classi…cation Codes: O11,O21,O432
