Endogenous Technical Change Research Articles

An extended Goodwin model with endogenous technical change and labor supply

This paper extends the Goodwin model of distributive cycles by incorporating the simultaneous endogeneity of technical change and labor supply within a classical-Marxian framework. It reinterprets induced innovation, suggesting that firms optimize mechanization to maximize cost reduction, obtaining a micro-founded relationship between mechanization and the wage share. Additionally, it assumes a positive relationship between labor supply and the employment rate. The resulting three-dimensional dynamical system includes wage share, employment rate, and capital-output ratio as state variables. The Hopf bifurcation theorem reveals the emergence of limit cycles as the employment rate's effect on labor productivity (reserve-army-creation effect) approximates a critical value from below. Numerical simulations for 10 OECD countries illustrate the cyclical nature of the model and its consistency with empirical patterns. Furthermore, a sensitivity analysis explores the effect of parameters variations, emphasizing the social dimensions of productivity and labor supply as critical factors defining the stability of distributive cycles.

Increasing returns and labor markets in a predator–prey model

The purpose of this work is to study the joint interaction of three founding elements of modern capitalism, namely endogenous technical change, income distribution, and labor markets, within a low-dimensional nonlinear dynamic setup extending the Goodwin model. Going beyond the conservative structure typical of the predator–prey model, we insert an endogenous source of energy, namely a Kaldor–Verdoorn (KV) increasing returns specification, that feeds the dynamics of the system over the long run and in that incorporates a transition to an (anti)-dissipative framework. The qualitatively dynamics and ample array of topological structures reflect a wide range of Kaldorian stylized facts, as steady productivity growth and constant shares of income distribution. The intensity of learning regimes and wage sensitivity to unemployment allow to mimic some typical traits of both Competitive and Fordist regimes of accumulation, showing the relevance of the demand-side engine, represented by the KV law, within an overall supply-side framework. High degrees of learning regimes stabilize the system and bring it out of an oscillatory trap. Even under regimes characterized by low degrees of learning, wage rigidity is able to stabilize the business cycle fluctuations and exert a positive effect on productivity growth.

Optimal Climate Policy Under Exogenous and Endogenous Technical Change: Making Sense of the Different Approaches

Optimal Climate Policy Under Exogenous and Endogenous Technical Change: Making Sense of the Different Approaches

A Generic Neoclassical Growth Model with Endogenous Technical Change and Endogenous Labor Participation

A Generic Neoclassical Growth Model with Endogenous Technical Change and Endogenous Labor Participation

Nuclear Energy, Economic Growth, and the Environment: Optimal policies in a model with endogenous technical change and environmental constraints

We use a model of endogenous growth with vertical innovations, in order to derive optimal energy policy under uncertainty. Innovation can be directed to dirty, green, or nuclear technologies, which in turn can be used to produce different types of energy. We show that, nuclear energy usage, is not only a necessary welfare maximizing condition, but also a crucial determinant of economic growth in the long run. Lastly, we find no evidence supporting the traditional Environmental Kuznets Curve hypothesis under optimal policy implementation.

The role of technical change in low-carbon transformation and crises in the electricity market: A CGE analysis with R&D investment

The Russia–Ukraine conflict has exacerbated the global energy and electricity crisis. Considering China's carbon neutrality target, predicting the power market's response to the mandate of energy transformation and the impact of the energy crisis is particularly critical. Technical change is essential for the power sector to solve these crises; however, limited studies have systematically evaluated the role of endogenous technical change in low-carbon transformation of the power sector from an economy-wide perspective. Therefore, applying a multi-sector computable general equilibrium model, this study examines the potential trajectory of research and development (R&D)-based endogenous technical change, investigating the impact of different technical changes on China's power sector, the overall socio-economy, and the energy environment. The relevant results are threefold. First, carbon pricing combined with subsidising renewable electricity is an effective way to reduce emissions to achieve low-carbon transformation in the power sector. This approach can cause relatively moderate losses for the macro-economy and households' welfare. It can also significantly improve the renewable share, electrification rate and synergistic abatement effects on sulphur dioxide and nitrogen oxides. Second, shifting R&D inputs from fossil fuel power generation technology to renewable power technologies should be considered to advance the deep decarbonisation of the power sector. This approach can further improve the renewable share and electrification rate and enhance synergistic abatement effects; however, it can also slightly increase the macro-economic loss. Third, to alleviate the negative impacts to the macro-economy, it is advisable to consider increasing the R&D inputs of various sectors extensively, rather than only increasing that in the power sector. This approach can effectively alleviate the negative impacts on the socio-economy while improving the renewable share with the best synergistic abatement effects.

AgriLOVE: Agriculture, land-use and technical change in an evolutionary, agent-based model

This paper presents a dynamic agent-based model of land use and agricultural production under environmental boundaries, finite available resources and endogenous technical change. In particular, we model a spatially explicit smallholder farming system populated by boundedly-rational agents competing and innovating to fulfill an exogenous demand for food, while coping with a changing environment shaped by their production choices. Given the strong technological and environmental uncertainty, agents learn and adaptively employ heuristics which guide their decisions on engaging in innovation and imitation activities, hiring workers, acquiring new farms, deforesting virgin areas and abandoning unproductive lands. Such activities in turn impact farm productivity, food production, food prices and land use. We firstly show that the model can replicate key stylized facts of the agricultural sector. We then extensively explore its properties across several scenarios featuring different institutional and behavioral settings. Finally, we simulate the model across different applications considering deforestation and land abandonment; human-induced soil degradation; and climate impacts. AgriLOVE offers a flexible simulation environment to study the endogenous emergence of different agricultural production regimes from the interaction of spatially dispersed farms subject to resource constraints, spatial influence and climate change.

Gotta Catch ’Em All: CCUS with endogenous technical change

Gotta Catch ’Em All: CCUS with endogenous technical change

Is ICE freezing US agriculture? Farm-level adjustment to increased local immigration enforcement

We study the impact of US immigration enforcement through a locally-implemented program known as 287(g) on agriculture using confidential farm-level data and farm census data. We address the endogeneity of program participation by using pre-program county jail occupancy as an instrument. We provide evidence that the agricultural sector experienced limited endogenous technical change in response to the negative labor supply shock caused by increased immigration enforcement. Fuel expenses increased, consistent with predictions of an increase in automated technology by models of endogenous technical change. However, a corresponding decline in agricultural acres and employment and an increase in labor expenditure suggests capital-labor substitution was insufficient to fully offset the impact of the shock.

The Supply of Skill and Endogenous Technical Change: Evidence from a College Expansion Reform

Abstract We examine the labor market consequences of an exogenous increase in the supply of skilled labor in several municipalities in Norway, resulting from the construction of new colleges in the 1970s. We find that skilled wages increased as a response, suggesting that along with an increase in the supply there was also an increase in demand for skill. We also show that college openings led to an increase in the productivity of skilled labor and investments in R&D. Our findings are consistent with models of endogenous technical change where an abundance of skilled workers may encourage firms to adopt skill-complementary technologies.

The Multiplier Effect of Endogenous Technical Change Accelerates the Transition to Photovoltaic Cells

The Multiplier Effect of Endogenous Technical Change Accelerates the Transition to Photovoltaic Cells

Can International Technological Diffusion Substitute for Coordinated Global Policies to Mitigate Climate Change?

In short, yes. I use a multi-region integrated assessment model with fuel-specific endogenous technical change to examine the impact of Europe and China reducing emissions to zero by mid-century. Without international technological diffusion this is insufficient to avoid catastrophic climate change. But when innovation can diffuse overseas, long-run temperature increases are limited to 3 degrees. This occurs because policy not only encourages green innovations but also dissuades dirty innovations which would otherwise spread. The most effective policy package in emissions-reducing regions is a research subsidy funded by a carbon tax, driven in the short term by the direct effect of the carbon tax on the composition of energy, and later by innovation induced by research subsidies. Green production subsidies are ineffective because they undermine incentives for innovation.

Back to Basics: Basic Research Spillovers, Innovation Policy, and Growth

AbstractThis article introduces a general equilibrium model of endogenous technical change through basic and applied research. Basic research differs from applied research in the nature and the magnitude of the generated spillovers. We propose a novel way of empirically identifying these spillovers and embed them in a framework with private firms and a public research sector. After characterizing the equilibrium, we estimate our model using micro-level data on research expenditures by French firms. Our key finding is that uniform research subsidies can accentuate the dynamic misallocation in the economy by oversubsidizing applied research. Policies geared towards public basic research and its interaction with the private sector are significantly welfare-improving.

Firm beliefs and long-run demand effects in a labor-constrained model of growth and distribution

One of the most debated questions in alternative macroeconomics regards whether demand policies have permanent or merely transitory effects. While demand matters in the long run in (neo-) Kaleckian economics, both economists operating within other Keynesian traditions (e.g. Skott 1989) as well as Classical economists Dumenil and Levy (Manchester School 67(6):684–716, 1999) argue that in the long-run output growth is constrained by an exogenous natural growth rate. This paper attempts to bridge the gap by analyzing the role of firm beliefs about the state of the economy in a labor-constrained growth and distribution model based on Kaldor (Review of Economic Studies 23(2):83–100, 1956) and Goodwin (Journal of Evolutionary Economics 1(1):29–47, 1991) that is also compatible with the evolutionary perspective on coordination (or the lack thereof) within markets by Metcalfe et al. (Cambridge Journal of Economics 30:7–32, 2006). The main innovation is the inclusion of beliefs about economic activity in an explicitly dynamic choice of capacity utilization at the firm level. We show that: (i) the relevance of such beliefs generates an inefficiently low utilization rate and labor share in equilibrium, but (ii) the efficient utilization rate can be implemented through fiscal policy. Under exogenous technical change, (iii) the inefficiency does not affect the equilibrium employment rate and growth rate, but expansionary fiscal policy has positive level effects on both GDP and the labor share. However, (iv) with endogenous technical change a la Verdoorn (1949), fiscal policy has also temporary growth effects. Finally, (v) the fact that the choice of utilization responds to income shares has a stabilizing effect on growth cycles, even under exogenous technical change, that is analogous to factor substitution.

Endogenous Technical Change and Convergence of Per Capita Income: New Theory and Evidence

The formal theoretical model in this study enables segmentation of countries with respect to three factors, namely, the extent to which income inequality is adopted as a policy variable; the extent to which there is focus on generation of either of `incremental', or `disruptive' innovations; and the extent to which entrepreneurship that is not predicated on innovation is not encouraged. The resulting endogenous segmentation is shown to be more robust than segmentation that is predicated on countries that are covered, or not, in the database of the Organization for Economic Cooperation and Development (OECD). Using the resulting segmentation, empirical findings provide evidence for existence of country-specific steady states for sample countries. Convergence is a general equilibrium outcome, not because of accumulation of optimal amounts of physical capital, but because upon arrival at steady state, attempts at maintenance of preceding growth rates for Per Capita Income induce deterioration of a country's ranking with respect to each of Per Capita Income, and income inequality. Countries then, acting rationally transition to lower growth rates, resulting in convergence of country growth rates. Given sub-optimality of outcomes must arise endogenously from transition beyond steady state within any general equilibrium model, there is arrival at empirical validation for existence of country-specific steady states. Consistent with existence of steady states for growth rates of Per Capita Income, arrival at steady state is shown to be associated with lowest realizations of supplies of new manufacturing innovations.

Growth Strategies to Avoid the Middle-Income Trap

Since we coined the term in 2006, “the middle income trap” has been the subject of scores of investigations. The investigators have generally tried to answer one of two questions: Is there evidence to support the existence of the trap, and what can middle-income countries do to spring free of it? The evidence in support of its existence has been mixed, and the policy discussions have—to put it bluntly—been largely unhelpful. But our original proposition was that of the possibility of a trap, not its inevitability. We were more convinced of the absence of a functional theory of economic growth for middle-income economies. Solow-Swan models that stressed capital accumulation and exogenous technological change did well to explain growth in low-income countries, and Lucas-Romer models emphasizing learning and endogenous technical change identified the main drivers of growth in advanced economies and explained why capital and knowhow did not easily flow to poorer economies. Neither class of models has, to our knowledge, satisfactorily explained successful transitions from one type of growth to the other. In this paper, we propose that Schumpeterian models proposed by Aghion, Howitt and others that stress creative destruction and institutional change could provide the analytical foundations for understanding middle-income economies better. We present evidence that is consistent with the main predictions of this approach, and discuss its key policy implications, especially effective competition regimes, mechanisms to maintain social mobility, and adept management of economic crises.

Endogenous task-based technical change—factor scarcity and factor prices

This paper develops a static model of endogenous task-based technical progress to study how factor scarcity induces technological progress and changes in factor prices. The equilibrium technology is multi-dimensional and not strongly factor-saving in the sense of Acemoglu (2010). Nevertheless, labour scarcity induces labour productivity growth. There is a weak but no strong absolute equilibrium bias. This model provides a plausible interpretation of the famous contention of Hicks (1932) about the role of factor prices and factor endowments for induced innovations. It may serve as a microfoundation for canonical macro-economic models. Moreover, it accommodates features like endogenous factor supplies and a binding minimum wage.

Optimal Climate Policy with Directed Technical Change, Extensive Margins and a Decreasing Elasticity of Substitution between Clean and Dirty Energy

This paper uses a benchmark climate model with endogenous technical change to consider the effects of three extensions on optimal policy under a clean transition. First, the movement of workers between non-energy and energy sectors lowers the cost of abatement by more than an order of magnitude, favouring taxes over subsidies. Second, the free movement of researchers between non-energy and energy sectors increases the power of policy to avert environmental disaster and leads to a period of intense research in the clean sector above the long-run share, as productivity in the clean sector catches up to the non-energy sector. Third, a decreasing elasticity of substitution between clean and dirty inputs as the share of clean energy rises is considered, reflecting the increasing difficulty of integrating intermittent clean energy supply in electricity. A decreasing elasticity increases the initial optimal tax on dirty energy and therefore lowers the subsidies required to direct technical change towards clean energy.

Carbon Leakage in the context of increasing the EU greenhouse gas emission reduction targets – the ways the EU and global emission behave and what influences its scale

Abstract The lack of equal globally binding GHG’s emission reduction targets is currently leading to a set of diverging GHG’s emission prices across the world (or even no price for GHG’s emission in some regions). This may result in distortions with direct implications on competitiveness of the industries in regions with strict climate policies (as the European Union) and can cause the issue of carbon leakage. Carbon leakage is defined as ‘the increase in emission outside a region as a direct result of the policy to cap emission in this region’. This paper is the first part of the set of two analysis aiming at the carbon leakage assessment. In the following paper (aimed to be published this year), we will assess the impact of free allowances for emission intensive trade exposed industries (EITE) and the NDCs in the rest of the world countries – for the sake of brevity, we decided to remove these results from the current paper, but they will be presented later this year. The purpose of this paper is to assess the possible scale of the carbon leakage using different assumptions and policy scenarios and identify channels to efficiently prevent the carbon leakage phenomenon. The analysis has been carried out using the computable general equilibrium d-PLACE model developed within the Centre for Climate and Policy Analysis (CAKE). See: http://climatecake.pl/?lang=en Our model is a recursive dynamic multi-regional and multi-commodity tool in which emissions are modelled in great detail, for example, the process and each fossil fuel combustion related emission are modelled separately. Furthermore, the big advantage of the applied model is a very detailed modelling of EU ETS as well as non-ETS emission targets. In the paper, the simulations using two versions of model was presented – with and without endogenous technical change to elaborate on how the assumptions on technical change affect the modelling results and consequent scale of the carbon leakage. Moreover, this paper aims mainly at the assessment of different channels of carbon leakage; therefore, we do not take into account either NDCs in the rest of the world or free allowances for emission intensive trade exposed sectors. These problems will be handled in the next paper, aimed to be published later this year. Using the above mentioned CGE (computable general equilibrium model, we captured the main factors, that determine the carbon leakage rates. We assessed the contribution of three channels – demand channel, competitiveness channel and carbon intensity channel to the risk of carbon leakage. It turned out that carbon intensity channel and competitiveness channel are the most important, while demand channel contributes to changes in GHG’s emission only in the most restrictive scenario. Moreover, energy channel was further decomposed to the impact of sectoral structure and influence in emission intensity within each sector – the impact of these two channels is also similar, but dependent on the analysed scenario. Such a decomposition allowed us to determine the main channels through which the carbon leakage occur and pursue relevant policy recommendations.

A Two-Sector Model of Economic Growth with Endogenous Technical Change and Pollution Abatement

We provide insights into the relationships between technological development, economic growth, and pollution accumulation using a two-sector model of economic growth with endogenous technical change. In the model, output is produced using a polluting resource. Production can be used for either consumption or abatement of pollution. Scientists can be allocated between two research activities: resource-saving and abatement-augmenting technologies. Our results indicate conditional path dependency. Specifically, when the innovative capacity in the resource-saving research sector is sufficiently high, scientists are allocated to improve only the resource-saving technology, independently of the state of the technologies and environment. Consequently, the allocation of researchers is path-independent. When the innovative capacity in the abatement-augmenting research sector is sufficiently high, the optimal allocation of researchers depends on the initial level of the pollution stock or technologies but eventually will be directed to improve the abatement technology. We further characterize the optimal steady-state and off-steady-state dynamics and show that green growth is always socially optimal. By using a two-sector model, we address a lack of attention to multi-sector growth models in neoclassical growth theory and show that distinct results and transitional dynamics can emerge.