Direction of technical change, endogenous fertility, and patterns of growth

What type of technical progress is able to increase income per capita, instead of merely translating into higher fertility? To investigate this question, this paper first sets up an OLG growth model with capital, land and endogenous fertility. At each date, children compete with physical capital as a means of saving for the young. This framework is then put into motion by continuous neutral and investment-specific technical change. Neutral technical change leads to well-known Malthusian dynamics and cannot make the wage rate grow asymptotically. On the contrary, investment technology alters the relative price of capital and children and so also affects the households’ accumulation/fertility decisions. If capital and labor are strict substitutes in the production function, continuous investment-specific technical change results in long-term growth of per capita income. When the direction of technical change is made endogenous, the agents most often tend to undertake R&D that increases neutral productivity, leading to stagnation of per capita income. The theory is used to interpret some evidence on the first steps of the Industrial Revolution. ∗Paris School of Economics. 48, boulevard Jourdan, 75014 Paris, France. (+33)1 43 13 63 14, [email protected]. I am most grateful to Daniel Cohen for his careful ideas and advices, as well as to Oded Galor, Basile Grassi, Mathias Lé, Andrea Matranga, Bertrand Wigniolle and participants at PSE seminars for comments and suggestions. I wish to thank Robert Allen for sharing and letting me use his estimates of factor shares.