The O-ring theory of economic development is a model of economic development put forward by Michael Kremer in 1993,[1] which proposes that tasks of production must be executed proficiently together in order for any of them to be of high value.
The key feature of this model is positive assortative matching, whereby people with similar skill levels work together.
[1] The model argues that the O-ring development theory explains why rich countries produce more complicated products, have larger firms and much higher worker productivity than poor countries.
[2] The name is a reference to the 1986 Challenger shuttle disaster, a catastrophe caused by the failure of O-rings.
The model assumes that firms are risk-neutral, labor markets are competitive, workers supply labor inelastically, workers are imperfect substitutes for one another, and there is a sufficient complementarity of tasks.
Laborers can use a multitude of techniques of varying efficiency to carry out these tasks depending on their skill.
As Kremer puts it, "If strategic complementarity is sufficiently strong, microeconomically identical nations or groups within nations could settle into equilibria with different levels of human capital".
For this purpose, he distinguishes between O-ring jobs—jobs featuring high strategic complementarities in terms of skill—and foolproof jobs—jobs characterized by diminishing returns to labor—and assumes both production technologies to be available to all countries.