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Directed Technical Change in Labor and Environmental Economics
Abstract
It is increasingly evident that the direction of technological change responds to economic incentives. We review the literature on directed technical change in the context of environmental economics and labor economics, and we show that these fields have much in common both theoretically and empirically. We emphasize the importance of a balanced growth path and show that the lack of such a path is closely related to the slow development of green technologies in environmental economics and to growing inequality in labor economics. We discuss whether the direction of innovation is efficient.
Expected final online publication date for the Annual Review of Economics, Volume 13 is August 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
... Acknowledging that energy transition is essentially a process of social structural transition, we will quickly notice that advanced technology is developed through endogenous competition, which changes the direction of evolution in the energy system [13]. This J u s t A c c e p t e d 4 ultimately leads to the transformation of innovation and the economy [14,15]. ...
... Based on modern endogenous growth theory [31,32], the characteristic of the directed technological change (DTC) model is that innovation is built on the shoulders of giants. This means that innovators not only improve current technologies but also enable future innovators to build upon their innovations [15]. The earliest example of DTC was proposed by Aghion & Howitt (1992) [31], who modeled research and development separately and analyzed the incentives of researchers to allocate their efforts to both. ...
... From a theoretical point of view, a recent stream of endogenous growth models applied to the environment have shown that policy is crucial for the development of clean technologies, given the path-dependent nature of technical change (Acemoglu et al., 2012;Hémous and Olsen, 2021). A sole market-based policy, such as carbon-tax, is not enough (Acemoglu et al., 2012). ...
... Modern endogenous growth models applied to the environment have shown that sciencepush policies play an important role for the development of clean technologies (Acemoglu et al., 2012;Hémous and Olsen, 2021). Facing the path-dependent nature of technical change, public support can help firms internalize the (high) long term social returns of clean technologies and break the cumulative advantages of dirty ones. ...
... While such innovations can also help reduce emissions, energy is a complementary input to nonenergy inputs and the economy is not going to undergo a transition from energy to nonenergy inputs. This is why directed technical change models that focus on energysaving versus energy-using innovation do not find an important role for R&D subsidies in the design of climate policy (see Hassler, Krusell, andOlovsson 2021, or Hémous andOlsen 2021). fossil fuels toward cleaner energy. ...
... Human capital theory underscores the importance of education and skill development in achieving advanced status (Kaufman & Geroy, 2007) (Abada & Tenkorang, 2009) (Adeniran et al., 2012). Schultz (1961) argues that investments in education lead to increased labor productivity (Schultz, 1961), while Lucas (1988) emphasizes the role of skilled workers in driving innovation and technological progress (Bosio & Cristini, 2018) (Hémous & Olsen, 2021) (Clark, 1985) (Prajogo & Ahmed, 2006). e. Political Economy and Developmental State Approaches: ...
The process of national transformation from developing to developed status is a complex endeavor that requires addressing multidimensional challenges while capitalizing on strategic opportunities. This research investigates the challenges faced by developing countries in their transformation journey, identifies effective strategies for achieving successful transformation, and explores the implications for policy formulation. Multidimensional challenges encompassing political instability, economic disparities, inadequate education and healthcare, environmental degradation, and gender inequality are analyzed in their interconnectedness. Effective transformation strategies encompass human capital development, economic diversification, governance reforms, sustainability integration, trade promotion, social inclusion, innovation, and international collaboration. The research draws insights from successful transformation case studies, including South Korea, Singapore, China, and others, highlighting the role of visionary leadership, strategic investments, and adaptability to global dynamics. Policy implications emphasize holistic approaches, good governance, investment in education and infrastructure, economic diversification, social equity, and climate resilience. The research identifies areas for further exploration, including long-term impact assessments, context-specific strategies, sustainable development metrics, gender equality, and behavioral economics. In conclusion, this research contributes a comprehensive understanding of the challenges, strategies, and implications involved in national transformation, guiding governments, international organizations, and stakeholders toward sustainable and equitable development paths
... 67 We conclude that clean energy subsidies are not an effective way to combat global warming if the elasticity of substitution between energy sources is fixed and the innovation rate in clean energy does not respond to incentives. Incorporating directed technical change, as in Hémous and Olsen (2021), into our spatial integrated assessment model is challenging but relevant. ...
Global warming is a worldwide and protracted phenomenon with heterogeneous local economic effects. We propose a dynamic economic assessment model of the world economy with high spatial resolution to assess its consequences. Our model features several forms of adaptation to local temperature changes, including costly trade and migration, local technological innovations, and local natality rates. We quantify the model at a 1° × 1° resolution and estimate damage functions that determine the impact of temperature changes on a region’s fundamental productivity and amenities conditional on local temperatures. Welfare losses from global warming are very heterogeneous across locations, with 20% losses in parts of Africa and Latin America but also gains in some northern latitudes. Overall, spatial inequality increases. Uncertainty about average welfare effects is significant but much smaller for relative losses across space. Migration and innovation are shown to be important adaptation mechanisms. We use the model to study the impact of carbon taxes, abatement technologies, and clean energy subsidies. Carbon taxes delay consumption of fossil fuels and help flatten the temperature curve but are much more effective when an abatement technology is forthcoming.
... Since AI grows at varying rates at various stages and the economy evolves gradually, the influence of AI on income inequality may vary throughout periods of economic growth. By including automation into the horizontal innovation growth model, Hé mous and Olsen demonstrated that economic development occurs in three stages: in the first stage, low-skilled wages and automation are lower, while income inequality and labor share are essentially steady (35). In the second phase, the degree of automation and the talent premium will both grow proportionally. ...
Rapid advancements in artificial intelligence (AI) will have a dramatic impact on the global economy. This paper provides a systematic review of the economic impact of AI, focusing on the promotion of AI on productivity and economic growth; the impact of AI on labor employment; and the question of whether AI will increase income inequality. On this basis, a summary of how to implement public policies to reduce the potential negative impacts of AI on the employment structure and income inequality is provided. Finally, a summary and prospective research directions are provided.
... 5 To date, all EU Member States, save Netherlands, have submitted their national plans. 6 The South Korean government, on the other hand, introduced a Green new deal as a policy, part of the Korean's government new package called the Korea New Deal. It is a rolled-out package of economic, environmental, and social reforms, which emerged in July 2020. ...
The European Commission announced the Green Deal package in December 2019 as the new growth strategy for the European Union (EU) based on the twin transition-digital and environmental; whereas South Korea included a Green Deal pillar in the Korean New Deal, which is the new national great transformation strategy, launched in July 2020. The present study provides a focus on the international public discourse on sustainability, green transition and it offers recent theoretical findings. Then, it gives details of the green deal packages and compares the cases of the EU and South Korea. It also demonstrates examples from selected EU Member States on how they plan to address climate and digital objectives in the mid-term through the Recovery and Resilience Facility, which targets immediate response to the Covid-19 crisis. Finally, the paper concludes.
New technologies are a key driver of labor market change in recent decades. There are renewed concerns that technological developments in areas such as robotics and artificial intelligence will destroy jobs and create political upheaval. This article reviews the vibrant debate about the economic consequences of recent technological change and then discusses research about how digitalization may affect political participation, vote choice, and policy preferences. It is increasingly well established that routine workers have been the main losers of recent technological change and disproportionately support populist parties. Digitalization also creates a large group of economic winners that support the political status quo. The mechanisms connecting technology-related workplace risks to political behavior and policy demands are less well understood. Voters may fail to fully comprehend the relative importance of different causes of structural economic change and misattribute blame to other factors. We conclude with a list of pressing research questions.
We explore how optimal emission abatement trajectories are affected by dynamic characteristics of greenhouse-gas emitting systems, such as inertia, induced innovation, and path-dependency, by formulating a compact and analytically tractable model with stylized damage assumptions to derive the optimal cost-benefit pathway. Our analytic solutions highlight how simple dynamic parameters affect the optimal abatement trajectory (including the optimal current effort and the cost of delay). The conventional cost-benefit result (i.e., an optimal policy with rising marginal costs that reflects discounted climate damages) arises only as a special case in which the dynamic characteristics of emitting systems are assumed to be insignificant. More generally, our model yields useful policy insights for the transition to deep decarbonization, showing that enhanced early action may greatly reduce both damages and abatement costs in the long run.
If one region of the world switches its research effort from dirty to clean technologies, will other regions follow? To investigate this question, this paper builds a North–South model that combines insights from directed technological change and quality-ladder endogenous growth models with business-stealing innovations. While North represents the region with climate ambitions, both regions have researchers choosing between clean and dirty applications, and the resulting technologies are traded. Three main results emerge: (1) In the long run, if the North’s research and development (R&D) sector is sufficiently large, researchers in South will follow the switch from dirty to clean R&D made by researchers in North, motivated by the growing value of clean markets. (2) If the two regions direct research effort toward different sectors and the outputs of the two sectors are gross substitutes, then the long-run growth rates in both regions will be lower than if the global research effort were invested in one sector. (3) If the North’s government induces its researchers to switch to clean R&D through clean technology subsidies, the welfare-maximising choice for South is to ensure that all of its researchers switch too, unless the social discount rate is high. The last result is true even if the South’s R&D sector is large.
This paper generalizes central results from the theory of (endogenously) directed technical change to settings where technology does not take a labor-augmenting form and with arbitrarily many levels of skill. Building on simple notions of complementarity, the results remain intuitive despite their generality. The developed theory allows to study the endogenous determination of labor-replacing, that is, automation technology through the lens of directed technical change theory. In an assignment model with a continuum of differentially skilled workers and capital, where capital perfectly substitutes for labor in the production of tasks, any increase in the relative supply of skilled workers stimulates investment into improving the productivity of capital, potentially leading skill premia to increase in relative skill supply. Relatedly, trade with a skill-scarce country discourages improvements in capital productivity, potentially reversing the standard Heckscher-Ohlin effects.
This paper studies the effect of emigration on technological change in sending locations after one of the largest migration events in human history, the mass migration from Europe to the United States in the 19th century. To establish causality, we adopt an instrumental variable strategy that combines local growing-season frost shocks with proximity to emigration ports. We document two sets of results. First, using novel data on technological patents, we find that emigration led to an increase in innovative activity in sending municipalities. Moreover, the increase in innovation is coupled with an increased adoption of new technologies in both the agricultural and industrial sectors. Second, in terms of local economic development, we find that emigration led to higher unskilled wages in agriculture, a shift towards employment in the nascent industrial sector, a larger presence of incorporated firms, as well as higher tax revenues.
Do higher wages lead to more automation innovation? To answer this question, we first introduce a new measure of automation by using the frequency of certain keywords in patent text to identify automation innovations in machinery. We validate our measure by showing that it is correlated with a reduction in routine tasks in a cross-sectoral analysis in the US. Then we build a firm-level panel dataset on automation patents. We combine macroeconomic data from 41 countries and information on geographical patent history to build firm-specific measures of lowskill and high-skill wages. We find that an increase in low-skill wages leads to more automation innovation with an elasticity between 2 and 4. An increase in highskill wages tends to reduce automation innovation. Placebo regressions show that the effect is specific to automation innovations. Finally, we use the Hartz labor market reforms in Germany for an event study and find that they are associated with a relative reduction in automation innovations.
The effects of automation on economic growth, education, and inequality are analyzed using an R&D-driven growth model with endogenous education in which high-skilled workers are complements to machines and low-skilled workers are substitutes for machines. The model predicts that automation leads to an increasing share of college graduates, increasing income and wealth inequality, and a declining labor share. We show that standard policy suggestions for the age of automation can trigger unintended side effects on inequality, growth, and welfare, irrespective of whether they are financed by progressive wage taxation or by a robot tax.
This paper analyzes a game in which countries repeatedly make emission and technology investment decisions. We derive the best equilibrium, that is, the Pareto-optimal subgame-perfect equilibrium, when countries are insufficiently patient for folk theorems to be relevant. Relative to the first best, the best equilibrium requires countries to overinvest in technologies that are green, that is, strategic substitutes for polluting, but to underinvest in adaptation and brown technologies, that is, strategic complements to polluting. Technological transfers and spillovers might discourage investments but can be necessary to motivate compliance with emissions when countries are heterogeneous.
This paper shows that different labor market policies can lead to differences in technology across sectors in a model of labor saving technologies. Labor market regulations reduce the skill premium and as a result, if technologies are labor saving, countries with more stringent labor regulation, which bind more for low skilled workers, become less technologically advanced in their high skill sectors, but more technologically advanced in their low skill sectors. We then present data on capital-output ratios, on estimated productivity levels and on patent creation, which tend to support the predictions of our model.
Should governments direct R&D from “dirty” into “clean” technologies? How important is this compared to carbon pricing? We inquire into this, introducing two novelties compared to recent literature. We introduce decreasing returns to R&D, and allow future carbon taxes to influence current R&D decisions. Our results suggest that governments should prioritize clean R&D. Dealing with major environmental problems requires R&D to shift to clean technology. However, with most researchers working with clean technology, both productivity spillovers and future risks of being replaced increase. Consequently, the wedge between private and social value of an innovation is largest for clean technologies. This article is protected by copyright. All rights reserved
This paper studies the impact of labor supply on the creation of new technology, exploiting a large exogenous shock to the US agricultural labor supply caused by the termination of the Bracero agreements between the US and Mexico at the end of 1964. Using a text-search algorithm allocating patents to crops, I show a negative labor-supply shock induced a sharp increase in innovation in technologies related to more affected crops. The effect is stronger for technology related to labor-intensive production tasks. Farm-value dynamics indicate that, despite the positive technology reaction, the policy change was undesirable for farm owners. (JEL J22, J43, N32, O33, O34, Q12, Q16)
We study the long run implications of workplace automation induced by capital accumulation. We describe a minimal set of sufficient conditions for sustained growth, along with a declining labor share of income in the long run: (i) a basic asymmetry between physical and human capital; (ii) the technical possibility of automation in each sector; (ii) a self-replication condition on the production function for robot services; (iv) asymptotic homotheticity (more generally neutrality) of demand, and (v) a minimal degree of patience or intergenerational altruism among a fraction of households. However, the displacement of human labor is gradual, and absolute real wages could rise indefinitely. The results obtain in the absence of any technical progress; they extend to endogenous technical progress even if such progress is not biased ex ante in favor of automation.
Artificial intelligence (AI) is set to influence every aspect of our lives, not least the way production is organised. AI, as a technology platform, can automate tasks previously performed by labour or create new tasks and activities in which humans can be productively employed. Recent technological change has been biased towards automation, with insufficient focus on creating new tasks where labour can be productively employed. The consequences of this choice have been stagnating labour demand, declining labour share in national income, rising inequality and lowering productivity growth. The current tendency is to develop AI in the direction of further automation, but this might mean missing out on the promise of the ‘right’ kind of AI, with better economic and social outcomes.
This paper estimates the effect on innovation of increased market access facilitated by trade liberalization. We use a novel empirical design that exploits tariffcuts during the 1990s, along with detailed data on innovation among firms from 65 different countries. Our results reveal a large effect of tariff cuts on innovation as measured by patent data, suggesting that multilateral liberalization has pro-moted innovation and growth. These effects are not driven by the deterioration of innovation quality, and the results are robust to controlling for changes in the patent system and to industry-wide trends in innovation.
One important motivation for creating cap-and-trade programs for carbon emissions is the expectation that they will stimulate much-needed low-carbon innovation. I construct a new panel of British firms to investigate this hypothesis, finding that the European carbon market has encouraged greater low-carbon patenting and R&D spending among regulated firms without necessarily driving short-term reductions in carbon intensity of output. This stands in contrast to past cap-and-trade programs, which have primarily spurred adoption of existing pollution control technologies, with little effect on innovation. I discuss how to reconcile these contrasting findings and implications for the future of carbon markets. (JEL D22, O32, O34, Q52, Q54, Q58)
Using data for 134 countries, we document that countries deriving a larger share of their energy from fossil fuel are richer and grow faster. We then set up an endogenous growth model where final output is produced with a non-energy and two substitutable energy intermediate goods: fossil fuel and biofuel. With non-energy and energy goods being gross complements, and with higher costs for improving the energy efficiency for biofuel than for fossil fuel, there exist two balanced growth paths: one with low growth where energy is derived from biofuel and one with high growth where energy is sourced from fossil fuel. Heterogeneity in initial technology levels can generate the Great Divergence. The demand for fossil fuel in technologically advanced countries drives up its price, thereby reducing demand for fossil fuel in less advanced countries that instead choose the more stagnant energy input.
Innovation is an important part of environmental policy, and encouraging innovation is often an explicit goal of policymakers. A large literature in environmental economics examines the links between environmental policy and innovation. Popp et al. (2010) provides an extensive review of the literature on environmental innovation. This paper updates that review, highlighting research published during the past decade, with a focus on empirical research examining links between environmental policy and environmentally friendly innovation. I highlight major trends in the literature, including an increased number of cross-country studies and a focus on the effect of different policy instruments on innovation. I include a discussion of the justifications and evidence for technology-specific policy incentives and present evidence on the effectiveness of government R&D spending. My review concludes with a discussion of three promising areas for new research on environmental innovation.
We present a framework for understanding the effects of automation and other types of technological changes on labor demand, and use it to interpret changes in US employment over the recent past. At the center of our framework is the allocation of tasks to capital and labor—the task content of production. Automation, which enables capital to replace labor in tasks it was previously engaged in, shifts the task content of production against labor because of a displacement effect. As a result, automation always reduces the labor share in value added and may reduce labor demand even as it raises productivity. The effects of automation are counterbalanced by the creation of new tasks in which labor has a comparative advantage. The introduction of new tasks changes the task content of production in favor of labor because of a reinstatement effect, and always raises the labor share and labor demand. We show how the role of changes in the task content of production—due to automation and new tasks—can be inferred from industry-level data. Our empirical decomposition suggests that the slower growth of employment over the last three decades is accounted for by an acceleration in the displacement effect, especially in manufacturing, a weaker reinstatement effect, and slower growth of productivity than in previous decades.
We develop a climate policy model with directed technological change (DTC) in the energy sector. The model delivers both analytical and numerical results that give a clear understanding of the respective roles of research subsidies and emissions pricing. By contrast to existing models with DTC, ours is close in structure to recent integrated assessment models, leading to dramatically different results. Although clean-research subsidies are substantial initially, they subsequently decline whereas emissions taxes increase without bound. Furthermore, emissions taxes are far more important than research subsidies: in our baseline parameterization, a regulator unable to tax can only achieve 36% of potential benefits, whereas a regulator unable to subsidize can achieve 91% of potential benefits. © 2019 by The Association of Environmental and Resource Economists.
We examine the concerns that new technologies will render labor redundant in a framework in which tasks previously performed by labor can be automated and new versions of existing tasks, in which labor has a comparative advantage, can be created. In a static version where capital is fixed and technology is exogenous, automation reduces employment and the labor share, and may even reduce wages, while the creation of new tasks has the opposite effects. Our full model endogenizes capital accumulation and the direction of research toward automation and the creation of new tasks. If the long-run rental rate of capital relative to the wage is sufficiently low, the long-run equilibrium involves automation of all tasks. Otherwise, there exists a stable balanced growth path in which the two types of innovations go hand-in-hand. Stability is a consequence of the fact that automation reduces the cost of producing using labor, and thus discourages further automation and encourages the creation of new tasks. In an extension with heterogeneous skills, we show that inequality increases during transitions driven both by faster automation and the introduction of new tasks, and characterize the conditions under which inequality stabilizes in the long run.
An important class of active labor market policy has received little impact evaluation: immigration barriers intended to raise wages and employment by shrinking labor supply. Theories of endogenous technical advance raise the possibility of limited or even perverse impact. We study a natural policy experiment: the exclusion of almost half a million Mexican bracero farm workers from the United States to improve farm labor market conditions. With novel labor market data we measure state-level exposure to exclusion, and model the absent changes in technology or crop mix. We fail to reject zero labor market impact, inconsistent with this model.
We study the effect of minimum wage increases on employment in automatable jobs – jobs in which employers may find it easier to substitute machines for people – focusing on low-skilled workers for whom such substitution may be spurred by minimum wage increases. Based on CPS data from 1980-2015, we find that increasing the minimum wage decreases significantly the share of automatable employment held by low-skilled workers, and increases the likelihood that low-skilled workers in automatable jobs become nonemployed or employed in worse jobs. The average effects mask significant heterogeneity by industry and demographic group, including substantive adverse effects for older, low-skilled workers in manufacturing. We also find some evidence that the same changes improve job opportunities for higher-skilled workers. The findings imply that groups often ignored in the minimum wage literature are in fact quite vulnerable to employment changes and job loss because of automation following a minimum wage increase.
A carbon tax can induce innovation in green technologies. I evaluate the quantitative impact of this channel in a dynamic, general equilibrium model with endogenous innovation in fossil, green, and nonenergy inputs. I discipline the parameters using evidence from historical oil shocks, after which both energy prices and energy innovation increased substantially. I find that a carbon tax induces large changes in innovation. This innovation response increases the effectiveness of the policy at reducing emissions, resulting in a 19.2 percent decrease in the size of the carbon tax required to reduce emissions by 30 percent in 20 years.
We extend the task-based empirical framework used in the job polarization literature to analyse the susceptibility of low-wage employment to technological substitution. We find that increases in the cost of low-wage labour, via minimum wage hikes, lead to relative employment declines at cognitively routine occupations but not manually-routine or non-routine low-wage occupations. This suggests that low-wage routine cognitive tasks are susceptible to technological substitution. While the short-run employment consequence of this reshuffling on individual workers appears to be economically small, due to concurrent employment growth in other low-wage jobs, workers previously employed in cognitively routine jobs experience relative wage losses. This article is protected by copyright. All rights reserved.
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 (2017a)). 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.
In macroeconomic models, the elasticity of substitution between clean and dirty energy inputs within the energy aggregate is a central parameter in assessing the necessary conditions for long-run green growth. Using new sectoral data in a panel of 26 countries, we formulate specifications of nested constant elasticity of substitution production functions that allow estimating this parameter for the first time. We present evidence that it significantly exceeds unity, a favorable condition for promoting green growth. © 2017 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.
An important class of active labor market policy has received little rigorous impact evaluation: immigration barriers intended to improve the terms of employment for domestic workers by deliberately shrinking the workforce. Recent advances in the theory of endogenous technical change suggest that such policies could have limited or even perverse labor-market effects, but empirical tests are scarce. We study a natural experiment that excluded almost half a million Mexican 'bracero' seasonal agricultural workers from the United States, with the stated goal of raising wages and employment for domestic farm workers. We build a simple model to clarify how the labor-market effects of bracero exclusion depend on assumptions about production technology, and test it by collecting novel archival data on the bracero program that allow us to measure state-level exposure to exclusion for the first time. We cannot reject the hypothesis that bracero exclusion had no effect on U.S. agricultural wages or employment, and find that important mechanisms for this result include both adoption of less labor-intensive technologies and shifts in crop mix.
Electricity storage represents a solution to curb emissions by enabling more use of intermittent renewable energy. Our goal is to empirically analyze the determinants of innovation in electricity storage and its role in fostering technological innovations in renewable and conventional electricity generation. Using a global firm-level data set of electricity patents from 1963 to 2011, we find that better electricity storage promotes innovation not only in renewable energy but also in conventional technologies. Specifically, our estimates show that an additional storage patent increases the probability to apply for patents in renewable energy and efficiency-improving fossil fuel technologies two years from now by 1.09% and 0.65%, respectively. This implies that improved electricity storage technologies can boost the energy efficiency of conventional, fossil fuel-fired power plants as well as increase the use of renewable electricity. Thus, the ability of electricity storage to curb carbon emissions depends on: the competitiveness of renewable energy against conventional electricity generation, and conventional power generation mix as storage increases fossil-fuel efficiency and reduces ramping costs.
Governments regularly subsidize new ventures to spur innovation. This paper conducts the first large-sample, quasi-experimental evaluation of R&D subsidies. I use data on ranked applicants to the US Department of Energy's SBIR grant program. An early-stage award approximately doubles the probability that a firm receives subsequent venture capital and has large, positive impacts on patenting and revenue. These effects are stronger for more financially constrained firms. Certification, where the award contains information about firm quality, likely does not explain the grant effect. Instead, the grants are useful because they fund technology prototyping.
Endogenous growth requires that non-reproducible factors of production be either augmented or eliminated. Attention heretofore has focused almost exclusively on augmentation. In contrast, we study factor elimination. Maximizing agents decide when to reduce the importance of non-reproducible factors. We use a Cobb-Douglas production function with two factors of production, one reproducible ("capital") and one not ("labor"). There is no augmenting progress of any kind, thus excluding the standard engine of growth. What is new is the possibility of changing factor intensities endogenously by spending resources on R&D. The economy starts with no capital and no knowledge of how to use it. By conducting R&D, the economy learns new technologies that use capital, which then is built. There are two possible ultimate outcomes: the economy may achieve perpetual growth, or it may stagnate with no growth. The first outcome is an asymptotic version of the AK model of endogenous growth, and the second outcome is the standard Solow model in the absence of any exogenous sources of growth. Which outcome is achieved depends on parameter values of saving and production, and there always is a feasible saving rate that will give the perpetual growth outcome. The model thus provides a theory of the endogenous emergence of a production technology with constant returns to the reproducible factors, that is, one that is capable of supporting perpetual economic growth. The model also allows derivation of the full transition dynamics, which have interesting properties. One especially notable feature is that the origin is not a steady state. An economy that starts with pure labor production becomes industrialized through its own efforts. The theory thus offers a purely endogenous explanation for the transition from a primitive to a developed economy, in contrast to several well-known theories. Several aspects of the transition paths accord with the evidence, suggesting that the theory is reasonable. In contrast to almost all the existing endogenous growth literature, neither monopoly power nor an externality is a necessary condition for endogenous growth. It is sufficient that firms be able to appropriate the results of their research and development efforts.
We set up an endogenous growth model in which the efficiency of both capital and fossil energy can be improved, whereas the efficiency of one alternative energy source is limited. With capital and energy as complements, there exist two steady states: one stagnant where energy is fully derived from the alternative energy source, and one with balanced growth where energy is fully sourced from fossil fuel. Heterogeneity in initial TFP levels can generate the Great Divergence. The demand for fossil fuel in technologically advanced countries drives up its price and makes fossil fuel too costly in less advanced countries that choose the alternative and stagnant energy input.
In this paper we provide an analysis of directed technical change in the sector of electricity generation. We rely on patent data in fossil-fuel (FF) and renewable energy (REN) technologies for 5471 European firms over the 1978–2006 period. The novelty of our approach is in the focus on firm׳s heterogeneity in driving technological change. We make a distinction between small specialized firms, which innovate in only one type of technology, and large mixed firms, which innovate in both technologies, to analyse how REN patents can replace FF ones at the sector level both through a shift in innovation activities within existing firms and through firms׳ entry and exit. We use zero-inflated count data estimation techniques to identify the factors that affect specialized versus mixed firms׳ patenting behaviour both at the intensive (i.e., levels of innovation) and extensive (i.e., technological entry) margins. We further investigate the implications of our firm-level estimations for reducing the gap between REN and FF innovation at the aggregate level. We establish two key findings: (1) a decrease in the FF-REN technology gap mainly comes about through technological entry of specialized REN firms following an increase in REN market size; (2) increases in FF prices, FF market size, and FF knowledge stocks all increase the technology gap by increasing mixed firms FF innovation rates. An important implication of our results is that policies aimed at increasing REN innovation should focus on helping small firms to start and sustain innovation in the long-run.
We analyze the role of electricity storage for technological innovations in electricity generation. We propose a directed technological change model of the electricity sector, where innovative firms develop better electricity storage solutions, which affect not only the relative competitiveness between renewable and nonrenewable electricity sources but also the ease with which they can be substituted. Using a global firm-level data set of electricity patents from 1963 to 2011, we empirically analyze the determinants of innovation in electricity generation, and the role of storage in directing innovation. Our results show that electricity storage increases innovation not only in renewables but also in conventional technologies. This implies that efforts to increase innovation in storage can benefit conventional, fossil fuel-fired electricity plants as well as increasing the use of renewable electricity.
Does population aging and the associated increase in the old-age dependency ratio affect economic growth? The answer is given in a novel analytical framework that allows for population aging to affect endogenous capital- and labor-saving technical change. In a steady state capital-saving technical progress vanishes, and the economy's growth rate of per-capita variables reflects only labor-saving technical change. The mere possibility of capital-saving technical change is shown to imply that the economy's steady-state growth rate becomes independent of its age structure: Neither a higher life expectancy nor a decline in fertility affects economic growth in the long run.