The development problem under embodiment

Abstract

This paper studies technology adoption in an optimal growth model with embodied technical change. The economy consists of the final good sector, the capital sector, and the technology sector which role is the imitation of exogenous innovations. Scarce labor resources are allocated to the technology and final good sectors. The final good is allocated to consumption and to the capital sector. The authors analytically characterize the long run optimal allocations. Using a calibrated version of the model, they find that an acceleration in the rate of embodied technical change should not be responded by an immediate and strong adoption effort. Instead, adoption labor should decrease in the short run, and the optimal technological gap is shown to increase either in the short or in the long run. The state of the institutions and policies around the technology sector is key in the design of the optimal adoption timing. © 2006 The Authors; Journal compilation © 2006 Blackwell Publishing Ltd.