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Factor Saving Innovation

Michele Boldrin and David K. Levine

February 26,2001

Abstract: It has been argued that concave models exhibit less ``endogeneity of growth'' than models with increasing returns to scale. Here we study a simple model of labor saving technological improvement in a concave framework. Capital can be used either to reproduce itself, or, at some additional cost, to produce a higher quality of capital, that requires less labor input. If better quality capital can be produced quickly, we get a model of ``exogenous growth'' in which the economy grows at a fixed rate determined solely by technology, independent of preferences and desire for savings. If, however, better quality capital can be produced slowly, we get a model of ``endogenous growth'' in which the growth rate of the economy is determined by preferences and desire for savings, as well as by technology. Moreover, in the latter case, the process of growth is necessarily uneven, exhibiting a natural cycle with periods of ``growth recession.'' Growth path and technological innovations also exhibit dependence upon initial conditions. The model provides an initial step toward a theory of endogenous growth in Total Factor Productivity under conditions of perfect competition.