Economic growth and economic development 696

Introduction to Modern Economic Growth In this specification, δ measures the´degree when δ = 0, there is ³ of state-dependence: ´ ³ ˙ ˙ no state-dependence– ∂ NH /∂SH / ∂ NL /∂SL = η H /η L irrespective of the lev- els of NL and NH –because both NL and NH creates spillovers for current research in both sectors In this case, the results are identical to those in the previous subsection In contrast, when ´ δ³= 1, there´ is an extreme amount of state-dependence ³ In this case, ∂ N˙ H /∂SH / ∂ N˙ L /∂SL = η H NH /η L NL , so an increase in the stock of L-complementary machines today makes future labor-complementary innovations cheaper, but has no effect on the cost of H-complementary innovations This discussion clarifies the role of the parameter δ and the meaning of state dependence In some sense, state dependence adds another layer of “increasing returns,” this time not for the entire economy, but for specific technology lines In particular, a significant amount of state dependence implies that when NH is high relative to NL , it becomes more profitable to undertake more NH -type innovations With this formulation of the innovation possibilities frontier, the free entry conditions become (see Exercise 15.8): (15.34) η L NL (t)(1+δ)/2 NH (t)(1−δ)/2 VL (t) ≤ wS (t) and η L NL (t)(1+δ)/2 NH (t)(1−δ)/2 VL (t) = wS (t) if SL (t) > and (15.35) η H NL (t)(1−δ)/2 NH (t)(1+δ)/2 VH (t) ≤ wS (t) and η H NL (t)(1−δ)/2 NH (t)(1+δ)/2 VH (t) = wS (t) if SH (t) > 0, where wS (t) denotes the wage of a scientist at time t When both of these free entry conditions hold, BGP technology market clearing implies (15.36) η L NL (t)δ π L = η H NH (t)δ π H , where δ captures the importance of state-dependence in the technology market clearing condition, and profits are not conditioned on time, since they refer to the BGP values, which are constant as in the previous section (recall (15.15)) When δ = 0, this condition is identical to (15.26) in the previous section Therefore, as claimed above, all of the results concerning the direction of technological change would be identical to those from the lab equipment specification 682