Capability Accumulation and Conditional Convergence: Towards a Dynamic Theory of Economic Complexity

Abstract

We develop a dynamic model of economic complexity that endogenously generates a transition between unconditional and conditional convergence. In this model, convergence turns conditional as the capability intensity of activities rises. We solve the model analytically, deriving closed-form solutions for the boundary separating unconditional from conditional convergence and show that this model also explains the path-dependent diversification process known as the principle of relatedness. This model provides an explanation for transitions between conditional and unconditional convergence and path-dependent diversification.