In Discussion Paper No. 1139, Research Fellow Joseph Zeira presents a new way to model adoption of technological innovations, and applies this model to issues of economic growth. He shows that the process of technology adoption in an economy has significant implications for these issues. In most standard theories of technology adoption, innovations are new ways to increase output with the same amount of inputs. Hence, producers clearly always find it profitable to adopt new technologies. In Zeira's model, the adoption of technological innovations requires changes of input patterns, and profitability of such changes is not automatic, but depends crucially on input prices. Consequently, not all innovations are adopted in all countries, even if access is free.

The model can account for international differences in technology adoption and, as a result, in economic growth. Furthermore, it shows that even small differences between countries might lead to divergent development paths. The overlap between substitution of factors of production and technological change creates non-convexities in production because the production function itself is changed, explaining large international differences in output and growth. The model also has implications for income distribution. Economic growth and technology adoption increase the number of tasks performed by machines, diminishing the set of jobs performed by workers. Remaining jobs tend to be more difficult and higher paying. Hence, technology adoption accompanying economic growth makes the distribution of wages more equal. This result is in line with empirical evidence of a positive correlation between output and equity. But while other explanations for this correlation focus on the labour supply or the political process, this paper concentrates on the demand side of the labour market.

Workers, Machines and Economic Growth
Joseph Zeira

Discussion Paper No. 1139, March 1995 (IM)