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The Macroeconomics of Model T

  • Reto Foellmi
  • Tobias Wuergler
  • Josef Zweimüller

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 Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 459.

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Date of creation: Dec 2009
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Handle: RePEc:zur:iewwpx:459
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  1. Kiminori Matsuyama, 2000. "The rise of mass consumption societies," LSE Research Online Documents on Economics 6656, London School of Economics and Political Science, LSE Library.
  2. Reto Foellmi & Josef Zweimüller, . "Income Distribution and Demand-induced Innovations," IEW - Working Papers 212, Institute for Empirical Research in Economics - University of Zurich.
  3. Daron Acemoglu, 1998. "Why Do New Technologies Complement Skills? Directed Technical Change And Wage Inequality," The Quarterly Journal of Economics, MIT Press, vol. 113(4), pages 1055-1089, November.
  4. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," Working papers 527, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. 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.
  6. Acemoglu, D. & Zilibotti, F., 1998. "Productivity Differences," Papers 660, Stockholm - International Economic Studies.
  7. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1989. "Income Distribution, Market Size, and Industrialization," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 537-64, August.
  8. Galor, Oded & Moav, Omer, 2001. "Das Human Kapital," CEPR Discussion Papers 2701, C.E.P.R. Discussion Papers.
  9. Daron Acemoglu, 2002. "Directed Technical Change," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 781-809.
  10. 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.
  11. Paul M Romer, 1999. "Endogenous Technological Change," Levine's Working Paper Archive 2135, David K. Levine.
  12. Oded Galor & Omer Moav, 2004. "From Physical to Human Capital Accumulation: Inequality and the Process of Development," Review of Economic Studies, Wiley Blackwell, vol. 71(4), pages 1001-1026, October.
  13. 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.
  14. 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.
  15. Reto Foellmi & Josef Zweimueller, . "Inequality, Market Power, and Product Diversity," IEW - Working Papers 145, Institute for Empirical Research in Economics - University of Zurich.
  16. 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.
  17. Josef Zweimüller & Johann K. Brunner, 2005. "Innovation And Growth With Rich And Poor Consumers," Metroeconomica, Wiley Blackwell, vol. 56(2), pages 233-262, 05.
  18. 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).
  19. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  20. 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.
  21. 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.
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