ENDOGENOUS GROWTH AND INTERMEDIATION IN AN ARCHIPELAGO ECONOMY

A general equilibrium model based on the parable of an economy of many islands shows that market imperfections in the intermediation activit y affect economic growth and possibly prevent takeoff into sustained g rowth. The inhabitants of different islands accumulate heterogeneous a ssets and transportation-type intermediation allows for better allocat ion of the productive resources. The development process is accompanie d by a reduction in intermediation costs, which induces firms to adopt more efficient techniques and sustains economic growth. A laissez-fai re economy suffers from two distortions: the existence of market imper fections and a 'thick market' externality.