Factor-Augmenting Technology Choice and Monopolistic Competition

Abstract

We put forward a tractable, interpretable, and easily generalizable framework for modeling endogeneous factor-augmenting technology choice by monopolistically competitive firms. The setup is framed within the standard Dixit and Stiglitz (1977) model of monopolistic competition. Optimal technology choice is made here either by final goods producers or the representative household which holds the shares of (differentiated) intermediate goods producers. These two cases have different implications for the distribution of output but they yield the same aggregate level of output, the same aggregate production function and equivalent macroeconomic dynamics. Thanks to this property, the proposed framework can be used as a building block in a variety of embedding structures, including those which require to be solved recursively (separately for the dynamics of aggregate variables and for the distribution in each time period).