DP3262 Factor Saving Innovation

Author(s): Michele Boldrin, David Levine
Publication Date: March 2002
Keyword(s): aggregate productivity, choices and consequences, innovation and invention, measurement of economic growth, one, two and multisector growth models, processes and incentives, technological change
JEL(s): D24, D51, O31, O33, O41, O47
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3262

It has been argued that concave models exhibit less ?endogeneity of growth? than models with increasing returns to scale. Here we study a simple model of factor saving technological improvement in a concave framework. Capital can be used either to reproduce itself, or, at some additional cost, to produce a higher quality of capital, which requires less labour input. If better quality capital can be produced quickly, we get a model of exogenous balanced growth as a special case of ours. If, however, better quality capital can be produced slowly, we get a model of ?endogenous growth? in which the growth rate of the economy and the rate of adoption of new technologies is determined by preferences, technology and initial conditions. Moreover, in the latter case, the process of growth is necessarily uneven, exhibiting a natural cycle with alternating periods of high and slow growth. Growth paths and technological innovations also exhibit dependence upon initial conditions. The model provides a step toward a theory of endogenous innovation under conditions of perfect competition.