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Introduction to Modern Economic Growth the two factors, we have µ d log (MPH /MPL ) σ=− d log (H/L) ¶−1 The intuition for why, when σ < 1, H-augmenting technical change is L-biased is simple but important: with gross complementarity (σ < 1), an increase in the productivity of H increases the demand for labor, L, by more than the demand for H, in a sense, creating “excess demand” for labor As a result, the marginal product of labor increases by more than the marginal product of H This can be seen most clearly in the extreme case where σ → 0, so that the two factors become Leontieff In this case, starting from a situation in which γAL (t) L (t) = (1 − γ)AH (t) H (t), a small increase in AH (t) will create an excess of the services of the H factor, and its price will fall to 15.3 Baseline Model of Directed Technological Change In this section, we present the baseline model of directed technological change, which uses the expanding varieties model of endogenous technological change and the lab equipment specification of the innovation possibilities frontier The former choice is motivated by the fact that the expanding varieties model is somewhat simpler to work with than the model of competitive innovations introduced in the previous chapter The lab equipment specification, on the other hand, highlights that none of the results here depend on technological externalities Section 15.4 will consider a model of directed technological with change knowledge spillovers Exercise 15.19 shows that all of the results presented here generalize to a model of competitive innovations, thus the assumption of expanding varieties is only adopted for convenience The baseline economy has a constant supply of two factors, L and H, and admits a representative household with the standard CRRA preferences given by (15.2) Z∞ C (t)1−θ − dt, exp (−ρt) 1−θ 663