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A Quantitative Study of the Replacement Problem in Frictional Economies

  • Gianluca Violante
  • Andreas Hornstein
  • Per Krusell

The question of how technological change affects labor markets is a classical one in macroeconomics. A standard framework for addressing this question is the matching model with vintage capital and exogenous technical progress. Within this framework, it has been argued that the impact of technological change on labor market outcomes differs according to the mechanism through which the new technology enters the economy. In particular, it matters whether: (1) new capital replaces old capital by destroying the job and displacing the worker (Schumpeterian creative-destruction) or old capital can be "upgraded" to the frontier technology (Solowian upgrading); (2) firms make the technology adoption decision unilaterally (hold-up), or the investment decision is surplus-maximizing (efficient investment). Our main finding is that for quantitatively reasonable parameter values the specific details of the model for how technology is introduced and who decides on investments do not matter for the equilibrium outcomes of our main variables of interest: unemployment, wage inequality, and labor share. The intuition for this "equivalence result" is that these models will yield significantly different implications only if the matching process is very costly and time-consuming, but our calibration shows that this meeting friction is minor

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 64.

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Date of creation: 2004
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Handle: RePEc:red:sed004:64
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  1. Dale W. Jorgenson, 2001. "Information Technology and the U.S. Economy," American Economic Review, American Economic Association, vol. 91(1), pages 1-32, March.
  2. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
  3. Christopher A. Pissarides & Giovanna Vallanti, 2004. "Productivity Growth and Employment: Theory and Panel Estimates," CEP Discussion Papers dp0663, Centre for Economic Performance, LSE.
  4. King, Ian & Welling, Linda, 1995. "Search, unemployment, and growth," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 499-507, June.
  5. Boyan Jovanovic, 1998. "Vintage Capital and Inequality," NBER Working Papers 6416, National Bureau of Economic Research, Inc.
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