Sunday, December 30, 2012

Capital Biased Technological Change

Another current debate is about the implications of capital biased technological change. It looks like there is going to be a series from Krugman on this. A previous blog by Krugman made the strange assumption that the capital stock was fixed. According to this blogpost, if you allow the capital stock to adjust workers are not made worse off in absolute terms by capital biased technological change though inequality rises assuming that some people mainly get labor income and some mainly capital income. Of course, it would make more sense to at least be using a constant elasticity of substitution production function with an elasticity of substitution that is different to one between capital and labor. You can't get biased technological change in a Cobb Douglas function without the ad hoc assumption that the elasticities change as the overall level of productivity goes up.

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