IS TECHNICAL CHANGE EMBODIED IN THE CAPITAL STOCK OR NEW INVESTMENT

The question of technical change and productivity growth is one of the fundamental empirical issues of our time. Surprisingly, Solow's origi nal question of whether technical change is embodied in investment or the entire capital stock has been largely neglected. This paper seeks to bridge the early work of Solow and others on the extent of embodime nt of technical change with the more modern approach to estimating the structure of production and technical change using multifactor cost f unctions. We also attempted to identify the source and structural natu re of embodied technical change by decomposing it. Our theoretical mod el is applied to a pooled cross-section of six OECD countries for the 1965-1989 period. Our preferred model is one of full factor-augmenting embodied technical change because technical change augmenting the ent ire capital stock tends to overstate quality change in the aggregate c apital stock more than that embodied in new investment. This model spe cification supports the view that technical change is embodied in the stock of capital structure and is embodied in new investment of capita l equipment.