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Zvi Griliches and the Economics of Technology Diffusion: Linking innovation adoption, lagged investments, and productivity growth

Apr 2015
Working Paper
By  Paul A. David

The scientific legacy of Zvi Griliches’ contribution to the economic analysis of the diffusion of technological innovations is the subject of this paper. It begins with an examination of the relationship between Griliches’ pioneering empirical work on the introduction and adoption of hybrid corn and the subsequent development of theoretical models and econometric research on the microeconomic determinants of diffusion. Next, it formalizes the way that the dynamics of diffusion observed at the aggregate level is shaped by structural conditions at the micro-level – on both the supply and the demand sides of the market for products embodying technological innovations, both of which were addressed by Griliches (1957). It then points out the reflections of those processes in lagged behavior of aggregate investment in durable capital-embodied innovations – often regarded as an independent subject of Griliches’ analytical and econometric research. The latter connection, and its link with productivity changes stemming from embodied technical change, are made explicit by the model of micro-to-macro relationships affecting the total factor productivity (TFP) growth rate that is presented in the third major section of the paper (and the Appendix). The three foregoing dynamic phenomena - diffusion, durable investment lags, and TFP growth – were the topics of Griliches’ three most widely cited journal articles, respectively. The connections among them have not been generally noticed by economists, and, indeed they remained implicit his writings until late in his career, when he emphasized the diffusion-productivity nexus as a key proximate determinant of the pace of economic growth – a perception whose importance remains insufficiently appreciated in current policy discussions that focus attention on “innovation” as the driver of intensive growth. Having directed attention to the microeconomics of technology adoption underlying the ‘transitions’ during which the diffusion of major innovations generate surges in innovation-embodying capital formation, and to the consequent waves in the TFP growth rate at the industry and sectoral levels, should be seen as prominent among the important and enduring contributions that Zvi Griliches made to modern economics.

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paul a. david
paul david