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The macroeconomics of Model T

Listed author(s):
  • Foellmi, Reto
  • Wuergler, Tobias
  • Zweimüller, Josef

We study a model of growth and mass production. Firms undertake either product innovations that introduce new luxury goods for the rich; or process innovations that transform existing luxuries into mass products for 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 present a model of non-homothetic preferences, in which the rich consume a wide range of exclusive high-quality products and the poor a more narrow range of low-quality mass products. In this framework, inequality affects the composition of R&D through price and market size effects. The inequality–growth relationship depends on how mass production affects productivity; and on the particular dimension of inequality (income gaps versus income concentration). Our model is sufficiently tractable to incorporate learning-by-doing, oligopolistic market structures, and different sources of knowledge spillovers.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022053114000283
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 153 (2014)
Issue (Month): C ()
Pages: 617-647

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Handle: RePEc:eee:jetheo:v:153:y:2014:i:c:p:617-647
DOI: 10.1016/j.jet.2014.03.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. Kiminori Matsuyama, 1999. "The Rise of Mass Consumption Societies," Discussion Papers 1289, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Galor, Oded & Moav, Omer, 1999. "From Physical to Human Capital Accumulation: Inequality in the Process of Development," CEPR Discussion Papers 2307, C.E.P.R. Discussion Papers.
  3. Acemoglu, Daron, 1997. "Why Do New Technologies Complement Skills? Directed Technical Change and Wage Inequality," CEPR Discussion Papers 1707, C.E.P.R. Discussion Papers.
  4. Aghion, P. & Howitt, P., 1990. "A Model Of Growth Through Creative Destruction," DELTA Working Papers 90-12, DELTA (Ecole normale supérieure).
  5. Foellmi, Reto & Zweimüller, Josef, 2005. "Income Distribution and Demand-Induced Innovations," CEPR Discussion Papers 4985, C.E.P.R. Discussion Papers.
  6. Daron Acemoglu, 2001. "Directed Technical Change," NBER Working Papers 8287, National Bureau of Economic Research, Inc.
  7. Kevin M. Murphy & Andrei Shleifer & Robert Vishny, 1989. "Income Distribution, Market Size, and Industrialization," The Quarterly Journal of Economics, Oxford University Press, vol. 104(3), pages 537-564.
  8. 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.
  9. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 71-102, October.
  10. Oded Galor & Omer Moav, 2000. "Das Human Kapital," Working Papers 2000-17, Brown University, Department of Economics.
  11. 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).
  12. Brunner, Johann K & Zweimüller, Josef, 1998. "Innovation and Growth with Rich and Poor Consumers," CEPR Discussion Papers 1855, C.E.P.R. Discussion Papers.
  13. Acemoglu, Daron & Zilibotti, Fabrizio, 2000. "Productivity Differences," CEPR Discussion Papers 2498, C.E.P.R. Discussion Papers.
  14. Chiaki Moriguchi & Emmanuel Saez, 2008. "The Evolution of Income Concentration in Japan, 1886-2005: Evidence from Income Tax Statistics," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 713-734, November.
  15. Foellmi, Reto & Zweimuller, Josef, 2004. "Inequality, market power, and product diversity," Economics Letters, Elsevier, vol. 82(1), pages 139-145, January.
  16. Falkinger, Josef & Zweimuller, Josef, 1996. "The cross-country Engel curve for product diversification," Structural Change and Economic Dynamics, Elsevier, vol. 7(1), pages 79-97, March.
  17. Kiminori Matsuyama, 1999. "A Ricardian Model with a Continuum of Goods under Non-homothetic Preferences: Demand Complementarities, Income Distribution, and North-South Trade," Discussion Papers 1241, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  18. Sue Bowden & Avner Offer, 1994. "Household appliances and the use of time: the United States and Britain since the 1920s," Economic History Review, Economic History Society, vol. 47(4), pages 725-748, November.
  19. Falkinger, Josef, 1994. "An Engelian model of growth and innovation with hierarchic consumer demand and unequal incomes," Ricerche Economiche, Elsevier, vol. 48(2), pages 123-139, June.
  20. Jackson, Laurence Fraser, 1984. "Hierarchic Demand and the Engel Curve for Variety," The Review of Economics and Statistics, MIT Press, vol. 66(1), pages 8-15, February.
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