Learning-by-Using and the Switch to Better Machines

In an attempt to account for the huge observed disparity in international incomes, several recent papers study models in the spirit of Solow (1960) where the adoptions of better technologies require investments in new equipment. This paper continues this line of research. It describes an economy in which firms install more productive machines and subsequent to these adoptions, learn how to use those machines. In contrast to these other papers, this one does not predict that firms always adopt the frontier technology whenever they switch technologies. In this model both the upper and lower supports of the distribution of operated technologies may differ between economies that differ in policy. Consequently, this model can generate larger differences in international incomes than these other models. These differences are still small relative to the data, however. (Copyright: Elsevier)