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Hicks meets Hotelling: the direction of technical change in capital–resource economies

Published online by Cambridge University Press:  19 September 2008

CORRADO DI MARIA
Affiliation:
University College Dublin, UCD Richview, Dublin 14, Ireland. Tel: +35317162714. Fax: +35317162788. Email: corrado.dimaria@ucd.ie
SIMONE VALENTE
Affiliation:
Centre of Economic Research, ETH Zurich. Tel: +41446324724. Fax +41446321362. Email: svalente@ethz.ch

Abstract

We analyze a two-sector growth model with directed technical change where man-made capital and exhaustible resources are essential for production. The relative profitability of factor-specific innovations endogenously determines whether technical progress will be capital- or resource-augmenting. We show that any balanced growth equilibrium features purely resource-augmenting technical change. This result is compatible with alternative specifications of preferences and innovation technologies, as it hinges on the interplay between productive efficiency in the final sector, and the Hotelling rule characterizing the efficient depletion path for the exhaustible resource. Our result provides sound micro-foundations for the broad class of models of exogenous/endogenous growth where resource-augmenting progress is required to sustain consumption in the long run, contradicting the view that these models are conceptually biased in favor of sustainability.

Type
Research Article
Copyright
Copyright © Cambridge University Press 2008

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