Biased Technological Change, Human strongCapitalstrong and Factor Shares..pdfVIP

Biased Technological Change, Human Capital and Factor Shares. Hernando Zuleta1 April 26, 2007 1 I am grateful to Veneta Andonova and AndrÈs Zambrano for comments and suggestions. Abstract We propose a one-good model where technological change is factor saving and costly. We consider a production function with two reproducible factors: phys- ical capital and human capital, and one not reproducible factor. The main pre- dictions of the model are the following: (a) The elasticity of output with respect to the reproducible factors depends on the factor abundance of the economies. (b) The income share of reproducible factors increases with the stage of develop- ment. (c) Depending on the initial conditions, in some economies the production function converges to AK, while in other economies long-run growth is zero. (d) The share of human factors (raw labor and human capital) converges to a pos- itive number lower than one. Along the transition it may decrease, increase or remain constant. Journal of Economic Literature classiÖcation: 011, 031, 033. Keywords: endogenous growth, human capital, factor using and factor saving innovations, factor income shares. 1 Introduction The works by Cobb and Douglas (1928) and Kaldor (1961) created a para- digm for macroeconomics. The idea that labor income share does not decrease or increase with time or with the stage of development have had important implications in macroeconomics and growth theory. Considering an aggregate production function, if factor income shares are constant and the price of each factor is determined by its marginal productivity then the elasticity of output with respect to each factor is also constant. In other words the constancy of factor shares implies that the Cob