Endogenous technological advance in an econometric model: implications forproductivity and potential output in the United States

This paper estimates a production function with endogenous technological ad vance, and incorporates it in a small econometric model to analyze its impl ications for long-term growth. The production function has constant returns to scale in labor and capital, and increasing returns to scale in all fact ors. Disembodied technological advance is measured primarily using the stoc k of research and development (R & D). Technology embodied in computers, or capital-augmenting technical advance, is implicitly taken into account thr ough the hedonic price index. The efficiency of R & D improves over time, s o that the elasticity for R & D in the production function is time-varying and increasing. The rate of increase is associated with computer quality, w hich is measured as a function of capacity and processing speed. In essence , there is a synergistic, multiplicative relationship between computer-base d technology and R & D. Residual technical advance is a stochastic process, showing substantial variation over time. In the model, the stocks of both physical capital and R & D are determined by a neoclassical adjustment equa tion. The equilibrium stocks are a negative function of the user cost and a positive function of growth in demand. The projected rate of productivity growth is much higher than in calculations using deterministic technology. While extrapolations based on deterministic technology estimated the sustai nable rate of productivity in the United States at roughly 1.1% per year in the late 1990s, this model yields a sustainable growth rate of over 1.9% p er year. Potential output in the early 21st century is significantly higher than widely predicted. (C) 2000 Elsevier Science B.V. All rights reserved.