Cost-share induced technological change and Kaldor’s stylized facts

This paper presents a theory of induced technological change in which firms pursue a random, local, and bounded search for productivity-enhancing innovations. Firms implement profitable innovations at fixed prices, which then spread through the economy. After diffusion, all firms adjust prices and wages. The model is consistent with a variety of price-setting behaviors, which determine equilibrium positions characterized by constant cost shares and productivity growth rates. Target-return pricing yields Harrod-neutral technological change with a fixed wage share as a stable equilibrium, consistent with Kaldor’s stylized facts, while allowing for deviations from equilibrium, as observed in the longer historical record.