CONVERGENCE IN STOCHASTIC GROWTH-MODELS - THE IMPORTANCE OF UNDERSTANDING WHY INCOME LEVELS DIFFER

Recent empirical papers study the convergence of per capita income, given an initial cross-sectional variation in per capita income. The question of why per capita income levels differ in the first place arises. This paper argues that the answer to this question has important implications for the estimation and interpretation of convergence models. If income is influenced by more than one factor, then we cannot expect a given cross-section of income levels to converge in the same manner at every point in time and for every set of countries, even if each country's income level is generated by the same economic model.