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The Macroeconomics of Model T

Author

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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.

Suggested Citation

  • Foellmi, Reto & Wuergler, Tobias & Zweimüller, Josef, 2009. "The Macroeconomics of Model T," CEPR Discussion Papers 7612, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7612
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    References listed on IDEAS

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    Cited by:

    1. Latzer, Hélène, 2018. "A Schumpeterian theory of multi-quality firms," Journal of Economic Theory, Elsevier, vol. 175(C), pages 766-802.
    2. repec:eac:articl:04/15 is not listed on IDEAS
    3. repec:spr:jknowl:v:8:y:2017:i:1:d:10.1007_s13132-016-0363-y is not listed on IDEAS
    4. Reto Foellmi & Josef Zweimüller, 2017. "Is inequality harmful for innovation and growth? Price versus market size effects," Journal of Evolutionary Economics, Springer, vol. 27(2), pages 359-378, April.

    More about this item

    Keywords

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

    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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