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1 This is the second of three volumes containing papers presented in the invited symposium of the Seventh World Congress of the Econometric Society. The papers summarize and interpret key recent developments and discuss current and future directions in a wide range of topics in economics and econometrics. They cover both theory and applications. Authored by leading specialists in their fields, these volumes provide a unique survey of progress in the discipline

3 Econometric Society Monographs No. 27 Advances in economics and econometrics: theory and applications Volume II

5 Advances in economics and econometrics: theory and applications Seventh World Congress Volume II Edited by DAVID M. KREPS and KENNETH F. WALLIS CAMBRIDGE UNIVERSITY PRESS

6 cambridge university press Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi, Tokyo, Mexico City Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York Information on this title: / Cambridge University Press 1997 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 1997 A catalogue record for this publication is available from the British Library Library of Congress Cataloguing in Publication data isbn Hardback isbn Paperback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. Information regarding prices, travel timetables, and other factual information given in this work is correct at the time of first printing but Cambridge University Press does not guarantee the accuracy of such information thereafter.

7 Contents List of contributors Preface page viii ix 1 Incentives and careers in organizations 1 Robert Gibbons 2 Endogenous growth: lessons for and from economic history 38 N.F.R. Crafts 3 Microtheory and recent developments in the study of economic institutions through economic history 79 Avner Greif 4 Poverty traps 114 Partha Dasgupta 5 Microenterprise and macropolicy 160 Robert M. Townsend 6 Markets in transition 210 John McMillan 7 Transition as a process of large-scale institutional change 240 Mathias Dewatripont and Gerard Roland 8 A Schumpeterian perspective on growth and competition 279 Philippe Aghion and Peter Howitt 9 Learning and growth 318 Boyan Jovanovic Index 340

8 Contributors Robert Gibbons Cornell University N.F.R. Crafts London School of Economics Avner Greif Stanford University Partha Dasgupta University of Cambridge Robert M. Townsend University of Chicago John McMillan University of California, San Diego Mathias Dewatripont Universite Libre de Bruxelles Gerard Roland Universite Libre de Bruxelles Philippe Aghion Nuffield College, Oxford Peter Howitt Universite des Sciences Sociales de Toulouse Boyan Jovanovic New York University

9 Preface This book contains papers presented in the invited symposium sessions of the Seventh World Congress of the Econometric Society, held at Keio University, Tokyo in August 1995, for which we were Program Co-Chairs. The papers summarize and interpret key recent developments and discuss current and future directions in a wide range of topics in economics and econometrics. These were chosen on the basis of their broad interest to members of the Society, and so cover both theory and applications, and to demonstrate the progress made in the period since the previous World Congress. The program also reflected the fact that this was the first World Congress held outside Europe and North America. The authors are leading specialists in their fields, yet do not overemphasize their own reseach contributions. In one case, the two speakers in the session have combined their papers into a single chapter for this book - a long one, needless to say. The more general objectives are reflected in the presentation of all the papers in a single book under a general title, with joint editorship, thus departing from the previous practice of separate "economic theory" and "econometrics" books. The size of the book has necessitated its division into three volumes, and thematic connections have suggested the contents of each volume. Within each volume the papers appear in the order of their presentation in Toyko, which we hope will help readers who were there to remember what a marvellous occasion the Congress was. We are grateful to the members of our Program Committee for much valuable advice, to the Chairs and discussants of the invited symposium sessions for their contributions, and to Patrick McCartan at Cambridge University Press for his guidance during the preparation and production of this book. More generally we wish to acknowledge the steadfast support we received in our task from Robert and Julie Gordon, respectively Treasurer and Secretary of the Society, and from Masahiro Okuno-Fujiwara, Chair of the Local Organizing Committee for the Congress. David M. Kreps Kenneth F. Wallis

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Camferfoge plain Cext* ESPRONCEDA EL ESTUDIANTE DE SALAMANCA ESPRONCEDA EL ESTUDIANTE DE SALAMANCA C A M B R I D G E A T T H E U N I V E R S I T Y 1966 PRESS cambridge university press Cambridge, New