Capital- and Labor-Augmenting Technical Change in the Neoclassical Growth Model

The determinants of the direction of technical change and the implications for economic growth are studied in the one-sector neoclassical growth model of Ramsey (1928), Cass (1965), and Koopmans (1965) extended to allow for endogenous capital- and labor-augmenting technical change. For this purpose, we develop a novel micro-foundation for the competitive production sector. It rests upon the idea that the fabrication of the final good requires tasks to be performed by capital and labor. Firms may engage in innovation investments that increase the productivity of capital and labor in the performance of their respective tasks. These investments are associated with new technological knowledge that accumulates over time. We analyze a version of the model with only labor-augmenting and one with capital- and labor-augmenting technical change. When only labor-augmenting technical change is allowed for we find that steady-state growth depends on the efficient capital intensity and, thus, on household preferences. When it is included, capital-augmenting technical change must vanish in the steady state. Moreover, the mere feasibility of capital-augmenting technical change drastically changes the comparative-static properties of the steady state, e.\,g., household preferences loose their effect on steady-state growth.