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The Macroeconomics of Model T

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  • Reto Foellmi
  • Tobias Wuergler
  • Josef Zweimüller

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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Bibliographic Info

Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 459.

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Date of creation: Dec 2009
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Handle: RePEc:zur:iewwpx:459

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Related research

Keywords: Inequality; technical change; growth; mass production; product innovations; process innovations.;

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References

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  1. Reto Foellmi & Josef Zweimüller, . "Income Distribution and Demand-induced Innovations," IEW - Working Papers 212, Institute for Empirical Research in Economics - University of Zurich.
  2. Oded Galor & Omer Moav, 2004. "From Physical to Human Capital Accumulation: Inequality and the Process of Development," GE, Growth, Math methods 0410005, EconWPA.
  3. 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.
  4. Oded Galor & Omer Moav, 2000. "Das Human Kapital," Working Papers 2000-17, Brown University, Department of Economics.
  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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Blog mentions

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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