The theory and estimation of endogenous technical change
Creators: name: McKay, Lloyd Edwin
Publisher: name: University of British Columbia
Year: 2010

description: In contrast with the bulk of conventional neoclassical economic theory this thesis treats the generation of technical change as an integral part of the producer's decision problem. The production of technical knowledge is modelled in the same manner as other outputs. To achieve this, the changeable pool of knowledge pertaining to the technical arts is denoted by a vector of stock variables. A general model of production with endogenous factor augmenting technical changes is specified as an optimal control problem in which these durable knowledge goods are the state variables. The corresponding co-state variables are the knowledge good shadow prices while the output of the various knowledge goods constitutes the control variables. This specification overcomes a number of the limitations that have commonly beset previous models of induced innovation, including the exclusion of interaction between the production of knowledge and the production of conventional outputs. The shadow price of factor i augmenting knowledge in this production model is well defined. It is the discounted present value of the future stream of expenditure on factor i per unit of type i knowledge. In addition to the familiar qualitative implications of such an optimal control problem this model implies that the optimal rate of Hicks neutral technical change increases in response to a scalar increase in the non-knowledge factor endowments. To derive an estimable econometric model of the production technology underlying this endogenous factor augmenting technical change model, the continually revised steady state values of the co-state variables are employed as approximations to the knowledge good shadow prices. A generalised Leontief variable profit function is postulated to represent the production technology in dual space. The estimable econometric model is constructed from the derived wage equations. This thesis presents estimates of three simple models each having endogenous technical change together with an analogous conventional model which has exponential exogenous rates of factor augmenting technical change for the private sector of the Canadian economy over the period 1947 to 1973. They are the cases of endogenous Hicks neutral technical change, Harrod neutral technical change and general factor augmenting technical change, when there are just two inputs (labour services and capital services) and one non-knowledge output. Maximum likelihood estimates for the first and third of these models yielded statistical evidence supporting the fundamental null hypothesis that the pattern of technical change in the Canadian economy between 1947 and 1973 has been significantly influenced by the knowledge good shadow prices. Furthermore, the empirical results for all three models reveals that the Canadian economy has experienced significant endogenous technical change during this period, given the absence of exogenous technical change. Similarly the estimation of the exogenous technical change model indicated that there has been significant non-neutral exogenous technical change during this period, given that there has been no endogenous technical change. However, due to the statistical evidence that the pattern of technical change has been significantly induced, modelling technical change endogenously has the important advantage of providing an explanation of the pattern of technical progress in terms of profit maximising behaviour.