Endogenous Capital-and Labor-Augmenting: Technical Change in the Neoclassical Growth Model

50 Pages Posted: 19 Jan 2016

See all articles by Andreas Irmen

Andreas Irmen

University of Luxembourg - Ceter for Research in Economic Analysis (CREA); CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Munich

Amer Tabakovic

Universite du Luxembourg

Date Written: December 08, 2015

Abstract

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 develop a novel 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. 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.

Keywords: endogenous technical change, induced innovation, capital- and labor-augmenting technical change, neoclassical growth model

JEL Classification: O310, O330, O410

Suggested Citation

Irmen, Andreas and Tabakovic, Amer, Endogenous Capital-and Labor-Augmenting: Technical Change in the Neoclassical Growth Model (December 08, 2015). CESifo Working Paper Series No. 5643. Available at SSRN: https://ssrn.com/abstract=2717425

Andreas Irmen (Contact Author)

University of Luxembourg - Ceter for Research in Economic Analysis (CREA) ( email )

162a, avenue de la Faïencerie
Luxembourg, L – 1511
Luxembourg

HOME PAGE: http://wwwen.uni.lu/recherche/fdef/crea/people/andreas_irmen

CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Munich

Poschinger Str. 5
Munich, DE-81679
Germany

Amer Tabakovic

Universite du Luxembourg ( email )

L-1511 Luxembourg
Luxembourg

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