This chapter complements previous ones by providing microeconomic foundations for the transition from the stagnation regime to the growth regime. These microeconomic foundations consist of a simple model of individuals choosing an education investment, subject to some budget constraints. It is shown that there exists a critical threshold for the stock of knowledge below which the individual does not invest in education, and above which the investment takes place. We then examine relations between individual decisions and the long-run dynamics of knowledge accumulation and economic development.

This chapter develops a microfounded model of institutional changes and uses it to examine the joint production of institutions and economic output. In that model, agents must decide to participate in the political life of the city, participation whose level affects the level of the quality of institutions, as well as the possibilities of long-run economic expansion. It is shown that there exists a critical threshold for the quality of institutions below which agents do not participate to the political life, and above which they do participate. It is also shown that the presence of political participation does not suffice to bring immediate economic take-off: several generations of citizens with positive political participation are needed to achieve economic take-off.