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What determines the direction of technological progress?

Li, Defu and Bental, Benjamin (2016): What determines the direction of technological progress?

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Identifying the key factors determiningthe direction of technological progress is of central importance for macroeconomics.This paper develops a framework based on Acemoglu(2002,2003) in which profit-maximizing firms undertake both labor- and capital-augmenting technological improvements. It deviates from that framework by the introduction of nonlinear accumulation functions for the primary factors of production. It proves that, although in the short run the change of relative factor prices as suggested by Hicks(1932) and the relative market size as argued by Acemoglu(2002) indeed affect the direction of technological progress, in the long run that direction depends only on the relative supply elasticities of primary factors with respect to their respective prices. Moreover, it is biased towards enhancing the effectiveness of the factor with the relatively smaller elasticity.According to these results labor productivity has hardly increased during the pre-industrial era because labor supply was highly elastic during that time. In contrast, the industrial revolution and the concurrent demographic transition caused capital supply elasticity to increase and that of labor supply to decrease, inducing a labor-biased technological progress.

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