The O-Ring Theory of Economic Development
Summary
Kremer models production in which quality across tasks multiplies, so a mistake in one step reduces the value of every other input. High-skill workers therefore sort together in equilibrium, while small differences in task quality can produce large differences in output and wages.
Why it matters
The model provides a microeconomic foundation for weak links in AI-enabled work. Automating many exposed tasks may yield limited end-to-end gains while one essential step remains unreliable, and dependable agents become especially valuable when tasks are strong complements.
What to keep in mind
The paper studies economic development and skill matching, not AI or automation. Real workflows may allow substitution, redundancy, or modular correction, so O-ring complementarity is one possible production structure rather than a universal description of work.