Economic growth and economic development 700

Introduction to Modern Economic Growth effect on NH /NL Since with σ > greater values of NH /NL tend to increase the relative price of factor H compared to L, this tends to make the strong bias result easier Returning to our discussion of the implications of the strong bias results for the behavior of the skill premium in the U.S market, Proposition 15.9 implies that values of the elasticity of substitution between skilled and unskilled labor significantly less than may be sufficient to generate strong equilibrium bias How much lower than the elasticity of substitution can be depends on the parameter δ Unfortunately, this parameter is not easy to measure in practice, even though existing evidence suggests that there is some amount of state dependence in the R&D technologies For example, this is confirmed by the empirical finding that most patents developed in a particular industry build upon and cite previous patents in the same industry 15.5 Directed Technological Change without Scale Effects We will now see that the market size effect and its implications for the direction of technological change are independent of whether or not there are scale effects The market size effect here refers to the relative market sizes of the users of two different types of technologies, not necessarily to the scale of the entire economy, whereas the scale effect concerns the impact of the size of the population on the equilibrium growth rate The results in this section show that it is possible to entirely separate the market size effect responsible for the weak and strong endogenous bias results and the scale effect Suppose that we are in the case with knowledge-based R&D model of the previous section, but only with limited spillovers from past research In particular, suppose that equation (15.32) is modified to (15.41) N˙ L = η L NLλ SL and N˙ L = η H NHλ SH , where λ ∈ (0, 1] In the case where λ = 1, we have the knowledge-based R&D formulation of the previous section, but with no state dependence When λ < 1, the extent of spillovers from past research are limited, and this economy will not have steady growth in the absence of population growth 686