Reference : Endogenous Capital- and Labor-Augmenting Technical Change in the Neoclassical Growth Model
Scientific journals : Article
Business & economic sciences : Macroeconomics & monetary economics
Endogenous Capital- and Labor-Augmenting Technical Change in the Neoclassical Growth Model
Irmen, Andreas mailto [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Center for Research in Economic Analysis (CREA) >]
Journal of Economic Theory
[en] Endogenous technical change ; Induced innovation ; Capital- and labor-augmenting technical change ; Neoclassical growth model
[en] The determinants of the direction of technical change and their implications for economic growth and economic policy are studied in the one-sector neoclassical growth model of Ramsey, Cass, and Koopmans extended to allow for endogenous capital- and labor-augmenting technical change. We build on a recently developed micro-foundation for the competitive production sector that rests on the idea that the fabrication of output requires tasks to be performed by capital and labor (Irmen, 2017). Firms may engage in innovation investments that increase the productivity of capital and labor in the performance of their respective tasks. These investments are associated with new technological knowledge that accumulates over time and sustains long-run growth. We show that the equilibrium allocation is not Pareto-efficient since both forms of technical change give rise to an inter-temporal knowledge externality. An appropriate policy of investment subsidies may implement the efficient allocation.

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