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The Macroeconomics of Model T

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  • Foellmi, Reto
  • Wuergler, Tobias
  • Zweimüller, Josef

Abstract

We study a model of endogenous growth where firms invest both in product and process innovations. Product innovations (that open up completely new product lines) satisfy the advanced wants of the rich. Subsequent process innovations (that decrease costs per unit of quality) transform the luxurious products of the rich into conveniences of the poor. A prototypical example for such a product cycle is the automobile. Initially an exclusive product for the very rich, the automobile became affordable to the middle class after the introduction of Ford's Model T, the car that "put America on wheels". We show that an egalitarian society creates strong incentives for process innovations (such as the Model T) whereas an unequal society creates strong incentives for product innovations (new luxuries). We show that the inequality-growth relationship depends on which type of innovative activity drives technical progress, analyzing both the characteristics of and the transition to the balanced growth path.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7612.

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Date of creation: Dec 2009
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Handle: RePEc:cpr:ceprdp:7612

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Keywords: growth; inequality; mass production; process innovations; product innovations; technical change;

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References

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  1. Chiaki Moriguchi & Emmanuel Saez, 2006. "The Evolution of Income Concentration in Japan, 1886-2002: Evidence from Income Tax Statistics," NBER Working Papers 12558, National Bureau of Economic Research, Inc.
  2. Galor, Oded & Moav, Omer, 2001. "Das Human Kapital," CEPR Discussion Papers 2701, C.E.P.R. Discussion Papers.
  3. Oded Galor & Omer Moav, 1999. "From Physical to Human Capital Accumulation: Inequality in the Process of Development," Working Papers 99-27, Brown University, Department of Economics.
  4. Reto Foellmi & Josef Zweimüller, . "Income Distribution and Demand-induced Innovations," IEW - Working Papers 212, Institute for Empirical Research in Economics - University of Zurich.
  5. NAGAOKA Sadao & John P. WALSH, 2009. "The R&D Process in the U.S. and Japan: Major findings from the RIETI-Georgia Tech inventor survey," Discussion papers 09010, Research Institute of Economy, Trade and Industry (RIETI).
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Inequality & innovation
    by chris dillow in Stumbling and Mumbling on 2009-12-21 14:43:33

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