Training, Adverse Selection and Appropriate Technology : Development and Growth in a Small Open Economy

Recent diffusion models cannot explain why the success of technology diffusion depends so critically on developing countries’ human capital levels. This paper examines three main issues. First, we endogenize both appropriate technologies and human capital formation. Second, we refine the human capital accumulation process by introducing uncertainty about worker quality and training efficiency. Finally, we allow for international diffusion of technology as a function of the host country’s endogenous ability to absorb technological spillovers. The resulting model is one of uneven growth where trade amplifies worker quality problems in laggard countries. In contrast, technology spillovers are shown to generate additional incentives to accumulate human capital in the laggard country, since this allows for faster adoption and diffusion of foreign technology in the future