Michael Kremer
Modern production requires the flawless execution of many complementary tasks, where the failure of a single step destroys the value of the entire product. Because highly skilled workers maximize their productivity only when paired with equally skilled peers, labor markets naturally generate positive assortative matching. This dynamic concentrates talent into high-skill firms and geographic regions. Small international differences in average worker skill translate into massive disparities in national productivity and income, driving the migration of skilled labor from poor to rich countries.
Economies can become trapped in low-income equilibria because the return on individual investment depends on the simultaneous investments of others. When a firm decides whether to adopt modern technology, it requires a network of suppliers, skilled workers, and consumer demand to be profitable. If other actors in the economy do not invest, the pioneer firm faces high costs and weak demand, rendering the investment unprofitable. This interdependence means that an economy can stagnate indefinitely, even when a more prosperous equilibrium is theoretically possible if all actors coordinate their efforts.
Evaluating the true impact of an economic policy requires isolating its causal effect from pre-existing trends and confounding variables. By randomly assigning a specific intervention to a treatment group and withholding it from a control group, economists can observe the exact behavioral and economic outcomes generated by the policy. This empirical method breaks down broad questions about human capital accumulation into testable microeconomic hypotheses. It allows policymakers to abandon ideological assumptions and build development strategies based on precise, quantifiable evidence of what actually changes human behavior.
Treating parasitic diseases generates massive benefits that extend far beyond the treated individual. Because intestinal worms are transmitted through contaminated soil and water, curing one child reduces the amount of infectious material deposited into the local environment, protecting nearby untreated children from infection. Since individuals primarily consider their own immediate health benefits rather than these widespread communal gains, private demand for treatment remains highly suboptimal. Mass public administration of free medicine is necessary to internalize these spillovers and eradicate the disease burden.
Replacing fully subsidized public health programs with cost-sharing models triggers drastic reductions in participation. When health organizations introduce even nominal fees for preventive medicines, demand plummets because the target populations place low private value on the treatments. People heavily discount the delayed private health benefits and entirely ignore the social value of reducing disease transmission. Consequently, attempts to achieve financial sustainability through user fees fail to generate meaningful revenue and simultaneously destroy the public health effectiveness of the intervention.
Pharmaceutical companies systematically underinvest in research for diseases that primarily afflict low-income populations. Firms anticipate that impoverished consumers cannot afford high prices and that governments will use political pressure to force prices down to marginal cost once a vaccine is invented, destroying any chance of recouping research and development expenses. Advance market commitments bypass this hold-up problem by legally guaranteeing a profitable purchase price for a specified volume of a successful vaccine. This mechanism artificially creates a lucrative market, incentivizing private firms to direct their research capabilities toward neglected global health crises.
Rational economic models often fail to predict the behavior of individuals facing severe financial and cognitive constraints. Agricultural workers frequently recognize the high long-term returns of using fertilizer but fail to purchase it due to present bias and procrastination. Because buying fertilizer requires immediate effort and expense for a delayed payoff, farmers postpone the purchase until they consume their available cash. Offering small, time-limited discounts immediately after the harvest exploits the farmers' temporary liquidity and creates a strict deadline, effectively overcoming procrastination and significantly boosting agricultural productivity.
The historical distribution of wealth and power permanently shapes the trajectory of a nation's economic institutions. Societies with extreme initial inequality tend to develop exclusionary legal and political frameworks that restrict access to education, credit, and property rights to a small elite. These restrictive institutions prevent the broader population from engaging in entrepreneurial activity and accumulating human capital. Over time, this dynamic creates a self-reinforcing cycle where economic stagnation preserves the unequal power structure, demonstrating that efficient markets do not spontaneously emerge when transaction costs and political barriers are high.