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The macroeconomics of Model T

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  • Foellmi, Reto
  • Wuergler, Tobias
  • Zweimüller, Josef
Abstract
We study a model of growth and mass production. Firms undertake either product innovations that introduce new luxury goods for the rich; or process innovations that transform existing luxuries into mass products for the poor. A prototypical example for such a product cycle is the automobile. Initially, an exclusive product for the very rich, the automobile became affordable to the middle class after the introduction of Ford's Model T, “the car that put America on wheels”. We present a model of non-homothetic preferences, in which the rich consume a wide range of exclusive high-quality products and the poor a more narrow range of low-quality mass products. In this framework, inequality affects the composition of R&D through price and market size effects. The inequality–growth relationship depends on how mass production affects productivity; and on the particular dimension of inequality (income gaps versus income concentration). Our model is sufficiently tractable to incorporate learning-by-doing, oligopolistic market structures, and different sources of knowledge spillovers.

Suggested Citation

  • Foellmi, Reto & Wuergler, Tobias & Zweimüller, Josef, 2014. "The macroeconomics of Model T," Journal of Economic Theory, Elsevier, vol. 153(C), pages 617-647.
    • Handle: RePEc:eee:jetheo:v:153:y:2014:i:c:p:617-647
    DOI: 10.1016/j.jet.2014.03.002
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Inequality & innovation
      by chris dillow in Stumbling and Mumbling on 2009-12-21 20:43:33

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    Cited by:

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    3. Daron Acemoglu, 2019. "Comment on "Trading Up and the Skill Premium"," NBER Chapters, in: NBER Macroeconomics Annual 2019, volume 34, pages 317-330, National Bureau of Economic Research, Inc.
    4. Latzer, Hélène, 2018. "A Schumpeterian theory of multi-quality firms," Journal of Economic Theory, Elsevier, vol. 175(C), pages 766-802.
    5. Esteban Jaimovich, 2021. "Quality growth: from process to product innovation along the path of development," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(2), pages 761-793, March.
    6. Wen-Tai Hsu & Lin Lu & Pierre M. Picard, 2023. "Income inequality, productivity, and international trade," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(1), pages 203-249, July.
    7. Gilles Saint-Paul, 2023. "The educated class and the fragility of consumer society," PSE Working Papers halshs-04129252, HAL.
    8. Baselgia, Enea & Foellmi, Reto, 2022. "Inequality and Growth: A Review on a Great Open Debate in Economics," CEPR Discussion Papers 17483, C.E.P.R. Discussion Papers.
    9. Ulrich Schetter & Maik T. Schneider & Adrian Jaeggi, 2024. "Inequality, Openness, and Growth through Creative Destruction," Graz Economics Papers 2024-16, University of Graz, Department of Economics.
    10. Alain Desdoigts & Fernando Jaramillo, 2017. "Learning by Doing, Inequality, and Sustained Growth: A Middle-class Perspective," EUSP Department of Economics Working Paper Series 2017/05, European University at St. Petersburg, Department of Economics.
    11. Diego Comin & Danial Lashkari & Martí Mestieri, 2021. "Structural Change With Long‐Run Income and Price Effects," Econometrica, Econometric Society, vol. 89(1), pages 311-374, January.
    12. Sirine MNIF, 2016. "Bilateral Relationship between Technological Changes and Income Inequality in Developing Countries," Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016), Colexio de Economistas de A Coruña, Spain and Fundación Una Galicia Moderna, vol. 1, pages 1-1, June.
    13. Sun, Tianyu & Tian, Liu, 2023. "No pain, no gain: implications in consumption and economic growth," SocArXiv 95fdm, Center for Open Science.
    14. Alain Desdoigts & Fernando Jaramillo, 2020. "Bounded Learning by Doing, Inequality, and Multi-Sector Growth: A Middle-Class Perspective," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 36, pages 198-219, April.
    15. Sirine MNIF, 2017. "The Impact of Inequality on Growth Driven by Technological Changes: a Panel of Developing Countries," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 8(1), pages 127-140, March.
    16. Sirine Mnif, 2015. "Impact of Inequalities on Technological Changes: Case of the Developing Countries," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 5(3), pages 460-478, March.
    17. Reto Foellmi & Josef Zweimüller, 2017. "Is inequality harmful for innovation and growth? Price versus market size effects," Journal of Evolutionary Economics, Springer, vol. 27(2), pages 359-378, April.
    18. Ulrich Schetter & Adrian Jäggi & Maik T. Schneider, 2021. "Inequality, Openness, and Growth through Creative Destruction," CID Working Papers 130a, Center for International Development at Harvard University.
    19. Marti Mestieri & Danial Lashkari & Diego Comin, 2015. "Structural Transformations with Long-Run Price and Income Effects," 2015 Meeting Papers 437, Society for Economic Dynamics.
    20. Meili, Rahel & Stucki, Tobias, 2023. "Money matters: The role of money as a regional and corporate financial resource for circular economy transition at firm-level," Research Policy, Elsevier, vol. 52(10).

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    More about this item

    Keywords

    Inequality; Technical change; Growth; Mass production; Product innovations; Process innovations;
    All these keywords.

    JEL classification:

    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • D30 - Microeconomics - - Distribution - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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