This paper argues that productivity puzzles like the Solow Paradox arise, in part, from the omission of an important dimension of the debate: the resource cost of achieving a given rate of technical change. A remedy is proposed in which a new parameter, defined as the cost elasticity of producing capital with respect to the rate of technical change, is introduced. This parameter is shown to be latent in the Hall-Jorgenson user-cost of capital, as well as in the Solow residual. It is also shown that an increase in the rate of embodied technical change may actually cause a decrease in the Solow residual, in the short run, if the parameter is greater than the ratio of the user cost to the corresponding asset price. Different values of the new parameter also correspond to different theories of technological innovation: the Solow-Swan and Cass-Koopmans assumption of costless technical change is consistent with a zero value of the cost elasticity parameter, while the model of endogenous growth with R&D externalities implies a larger value. Finally, the appropriate investment-good price deflator is shown to be a function of the cost-elasticity. When the parameter equals zero, no quality adjustment should be undertaken, but values greater than zero lead to a partial adjustment for quality change, and a value of one leads to a full correction.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
5569.
Length: Date of creation: May 1996 Date of revision: Handle: RePEc:nbr:nberwo:5569
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Zvi Griliches, 1998.
"The Search for R&D Spillovers,"
NBER Chapters,
in: R&D and Productivity: The Econometric Evidence, pages 251-268
National Bureau of Economic Research, Inc.
[Downloadable!]
Swan, Trevor W, 2002.
"Economic Growth,"
The Economic Record,
The Economic Society of Australia, vol. 78(243), pages 375-80, December.
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