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The Macroeconomics of Model T

Author Info

  • 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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Find related papers by 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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  1. Acemoglu, Daron, 2002. "Directed Technical Change," Review of Economic Studies, Wiley Blackwell, vol. 69(4), pages 781-809, October.
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  9. 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.
  10. Philippe Aghion & Peter Howitt, 1990. "A Model of Growth Through Creative Destruction," NBER Working Papers 3223, National Bureau of Economic Research, Inc.
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  16. Oded Galor & Omer Moav, 2000. "Das Human Kapital," Working Papers 2000-17, Brown University, Department of Economics.
  17. Foellmi, Reto & Zweimüller, Josef, 2005. "Income Distribution and Demand-Induced Innovations," CEPR Discussion Papers 4985, C.E.P.R. Discussion Papers.
  18. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  19. 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.
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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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