Econometrica: Sep, 2007, Volume 75, Issue 5
Equilibrium Bias of Technology
This paper presents three sets of results about equilibrium bias of technology. First, I show that when the menu of technological possibilities only allows for factor‐augmenting technologies, the increase in the supply of a factor induces technological change toward that factor—meaning that the induced technological change increases the relative marginal product of the factor becoming more abundant. Moreover, this induced bias can be strong enough to make the relative marginal product of a factor increasing in response to an increase in its supply, thus leading to an relative demand curve. I also show that these results about relative bias do not generalize when more general menus of technological possibilities are considered. Second, I prove that under mild assumptions, the increase in the supply of a factor induces technological change that is toward that factor—meaning that it increases its marginal product at given factor proportions. The third and most important result in the paper establishes the possibility of and conditions for —whereby the price (marginal product) of a factor in response to an increase in its supply. I prove that, under some regularity conditions, there will be strong absolute equilibrium bias the aggregate production function of the economy fails to be jointly concave in factors and technology. This type of failure of joint concavity is possible in economies where equilibrium factor demands and technologies result from the decisions of different agents.