377:(2013) builds upon Kremer's O-ring theory to explain why differences in worker skills are associated with "massive" differences in international productivity levels despite causing only modest differences in wages within a country. For this purpose, he distinguishes between O-ring jobs—jobs featuring high strategic complementarities in terms of skill—and foolproof jobs—jobs characterized by diminishing returns to labor—and assumes both production technologies to be available to all countries. He then goes on to show that small international variations in average worker skill per country result in both large international and small intra-national income inequality.
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differs depending on interpretation. It could represent the probability of a worker successfully completing a task, the quality of task completion expressed as a percentage, or the quality of task completion with the condition of a margin of error that could reduce quality. Output then equals the
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The model argues that the O-ring development theory explains why rich countries produce more complicated products, have larger firms and much higher worker productivity than poor countries.
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in 1993, which proposes that tasks of production must be executed proficiently together in order for any of them to be of high value. The key feature of this model is positive
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The important implication of this production function is positive assortative matching. This can be seen in a hypothetical four-person economy with two low skill workers (
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tasks. Laborers can use a multitude of techniques of varying efficiency to carry out these tasks depending on their skill. Skill is denoted by
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Wages will be more than proportionately higher in developed countries than would be assumed by measurements of skill levels;
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Jones, Garett (2013). "The O-ring sector and the
Foolproof sector: An explanation for skill externalities".
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Workers performing the same task earn higher wages in a high-skill firm than in a low-skill firm;
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The effects of local bottlenecks are magnified which also reduces the expected returns to skill;
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By this equation total product is maximized by pairing those with similar skill levels.
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O-ring effects across firms can create national low-production traps.
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There are several implications that can be derived from the model:
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investments in light of similar investments by those around them;
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Nafziger, E. W. (2005). "5 - Theories of
Economic Development".
489:(Ninth ed.). Addison Wesley. pp. 166–167, 169–170.
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tasks together and scaling it by a firm specific constant,
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substitutes for one another, and there is a sufficient
402:(1993). "The O-Ring Theory of Economic Development".
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148:{\displaystyle 0\leq q\leq 1}
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560:Human resource management
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415:: 551–575.
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356:brain drain
326:Conclusions
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370:Extensions
364:equilibria
80:of tasks.
48:Challenger
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521:CiteSeerX
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485:(2011).
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