“The O-Ring Theory of Economic Development,” M. Kremer (1993)

A Fine Theorem

The O-Ring theory is unquestionably one of the most influential papers in applied theory of the past 20 years. The basic idea is simple: Write a Cobb-Douglas utility function where instead of labor entering as a lump of homogenous efficiency units, n units of labor for n tasks must be supplied by n individuals. This represents situations where quantity cannot be substituted for quality. A football team can only have one quarterback, and a kitchen only one head chef. With probability 1-q(i), a given agent fails at his task – all tasks are identical – and destroys 1-q(i) of the final production. This is analagous to the space shuttle Challenger, which exploded despite having only one bad part, the famous O-Ring. For now, assume no uncertainty about skill.

What happens in equilibrium? As in Becker’s marraige model, there is perfect sorting: all workers in a given firm are of the…

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About Jim Rose

Utopia - you are standing in it promotes a classical liberal view of the world and champion the mass flourishing of humanity through capitalism and the rule of law. The origin of the blog is explained in the first blog post at https://utopiayouarestandinginit.wordpress.com/2014/03/12/why-call-my-blog-utopia-you-are-standing-in-it/

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