Could Prometheus be bound again? A contribution to the convergence controversy

This paper presents a neoclassical model of stochastic growth in which the probability of adverse shocks to production is inversely related to the aggregate stock of capital per capita. Postulating this endogenous relationship, justified by empirical evidence, the model yields predictions that are largely consistent with the recent findings of cross-country club convergence. Differently from the standard explanation based on multiplicity of steady states, this model is also able to yield predictions consistent with observable intra-distribution dynamics, thus accounting for phenomena such as economic miracles, growth disasters and reversals of fortune. (C) 2002 Elsevier Science B.V. All rights reserved.