Econometrica: Oct, 1969, Volume 37, Issue 4
Induced Factor Augmenting Technical Progress from a Microeconomic Viewpoint
M. I. Kamien, N. L. Schwartz
In this paper the question of induced factor augmenting technical change in the context of the profit maximizing firm is addressed. The Kennedy innovation possibility frontier is employed to describe the opportunities available to the firm for factor augmentation and from it the direction of factor augmentation can be chosen. In addition, this opportunity curve can be shifted inwards or outwards according to the expenditure on research and development. The selection of the direction and extent of technical change is first determined via a myopic decision rule and then by maximization of the present value of the stream of net revenue from production and sale of output less the cost of technical advance. In the latter problem the maximum principle of Pontryagin is employed. Questions regarding the existence of stationary states and stability are resolved, and the optimal solutions are compared with the myopic decision rules.