The Choice of Technology in Economic Development

The impact of capital accumulation on job creation is an important and interesting issue in economic development. This model provides a general-equilibrium framework for studying technology choice with unemployment in a developing economy based on microfoundations. Unemployment in the urban sector results from the existence of efficiency wages. Manufacturing firms engage in oligopolistic competition and choose technologies to maximize profits. A more advanced technology uses more capital and less labor. In the steady state, an increase in the amount of capital induces firms to choose more advanced technologies and the wage rate increases. While a higher capital stock always induces firms to choose more advanced technologies, urban unemployment rate may decrease, and agricultural sector employment may increase.