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The implications of embodiment and Putty-Clay to economic development

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  • Pessôa, Samuel de Abreu
  • Rob, Rafael

Abstract

In this paper we construct and analyze a growth model with the following three ingredients. (i) Technological progress is embodied. (ii) The production function of a firm is such that the firm makes both technology upgrade as well as capital and labor decisions. (iii) The firm’s production technology is putty-clay. We assume that there are disincentives to the accumulation of capital, resulting in a divergence between the social and the private cost of investment. We solve a single firm’s problem in this environment. Then we determine general equilibrium prices of capital goods of different vintages. Using these prices we aggregate firms’ decisions and construct the theoretical analogues of National Income statistics. This generates a relationship between disincentives and per capita incomes. We analyze this relationship and show the quantitative and qualitative roles of embodiment and putty-clay. We also show how the model is taken to data, quantified and used to determine to what extent income gaps across countries can be attributed to disincentives.

Suggested Citation

  • Pessôa, Samuel de Abreu & Rob, Rafael, 2004. "The implications of embodiment and Putty-Clay to economic development," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 544, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    • Handle: RePEc:fgv:epgewp:544
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    1. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996. "The Poverty of Nations: A Quantitative Exploration," NBER Working Papers 5414, National Bureau of Economic Research, Inc.
    2. Pranab Bardhan, 1969. "Equilibrium Growth in a Model with Economic Obsolescence of Machines," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 83(2), pages 312-323.
    3. Mark E. Doms & Timothy Dunne, 1998. "Capital Adjustment Patterns in Manufacturing Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 409-429, April.
    4. Christopher Bliss, 1968. "On Putty-Clay," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 35(2), pages 105-132.
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