Ideas, Idea Processing, and US TFP Growth: Testing the Weitzman Conjecture

Abstract

Innovativity-an economy's ability to produce the innovations that drive TFP growth-requires ideas and the ability to process those ideas into new products. We model innovativity as a function of endogenous idea processing capacity subject to an exogenous idea supply constraint and derive a method to identify innovativity that is independent of the TFP data itself. Using exogenous shocks and theoretical restrictions, we establish that: i) innovativity predicts the evolution of average TFP growth; ii) idea processing capacity is the binding constraint on innovativity; and iii) TFP growth fell after 1970 due to constraints on idea processing capacity, not idea supply.

Keywords: Innovation, Financial Market Effectiveness, Endogenous Growth, Total Factor Productivity

JEL Classification: O44, O43, O47, O16, O51, O31