ABSTRACT
This chapter reviews related literature and describes the main motivation and considers the basic model of an intersectoral growth economy. It examines the effect of relation-specific investment and describes the evolution of industry structure. It shows that in the steady state, the economy gets stuck in the “growth trap” where the economy achieves positive growth but at the lowest level. The process of increasing specialization and concomitant grouping and regrouping of factors of production needs to be modeled in order to elucidate their economic consequences. Relation-specific investment has been extensively studied by transaction cost economics and incomplete contract literature. The chapter examines the dynamic effects of relation-specific investment on innovation and structural change. The ownership structure is determined by the level of asset specificity or relation-specific investment. The most efficient remedy for the growth trap is to facilitate relation-specific investment among sectors and to decrease the degree of specialization in the economy.
