Wealth breeds decline : Reversals of leadership and consumption habits

In a two- region model, we formalize Kindleberger’s idea that wealth breeds first more wealth, and then decline : when one region leads, its inhabitants develop consumption habits incompatible with the necessary investment in knowledge to remain the leader. This gives the other region a window of opportunity to gain economic primacy. We learn from the theoretical model that differences across regions that have similar characteristics may persist even if physical capital flows from rich to poor regions. By exploiting the economics of the Hopf bifurcation we study patterns of alternating privacy, irreversible decline and monotonic convergence, according to the initial dispersion of knowledge and the strength of consumption habits. Even though exogenous factors may matter on some occasions, we show that they are not necessary to reverse economic leadership.