4.5 Michael Kremer’s O-Ring Theory of Economic Development

O-Ring Theory

Michael Kremer’s model where production depends on the success of several interdependent tasks; a single failure can drastically reduce total output (like a failed O-ring in a rocket).

O-Ring Production Function

A production model where the quality of output depends on the product of all workers’ skill levels.

Skill Complementarity

The tendency of workers with similar skill levels to work together, reinforcing inequality between high-skill and low-skill economies.

Wage Inequality

Differences in pay that arise because skilled workers are more productive in O-Ring-type environments.

High-Skill Clustering

The phenomenon where skilled workers and firms group geographically or sectorally, increasing productivity but widening gaps between regions.

Specialization and Matching

Efficient pairing of workers and tasks to maximize productivity under the O-Ring principle.

Implication for Development

Small improvements in quality or skill can lead to disproportionately large increases in national income.