Factor Prices and Technical Change: From Induced Innovations to Recent Debates

42 Pages Posted: 16 Nov 2001

See all articles by Daron Acemoglu

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: October 2001

Abstract

This paper revisits the induced innovation literature of the 1960s to which Phelps was a major contributor (Drandakis and Phelps, 1965). This literature was the first systematic study of the determinants of technical change and also the first investigation of the relationship between factor prices and technical change. I present a modern reformulation of this literature based on the tools developed by the endogenous growth literature. This reformulation confirms many of the insights of the induced innovations literature, but reveals a new force, which I refer to as the market size effect: there will be more technical change directed at more abundant factors.

I use this modern reformulation to shed light on two recent debates: (1) why is technical change often skill biased, and why has it become more skill biased during recent decades? (2) What is the role of human capital differences in accounting for income differences across countries? Interestingly, an application of this modern reformulation to these debates also reiterates some of the insights of another important paper by Phelps, Nelson and Phelps (1966).

Keywords: Biased technical change, endogenous technical change, factor distribution of income, growth, innovation, skill-biased technical change, and technology.

JEL Classification: E25, J31, O30, O31, O33

Suggested Citation

Acemoglu, Daron, Factor Prices and Technical Change: From Induced Innovations to Recent Debates (October 2001). Available at SSRN: https://ssrn.com/abstract=290826 or http://dx.doi.org/10.2139/ssrn.290826

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