The Market for Innovations. Factor Bias and Innovation: A Microeconomic Approach

Abstract

THE MARKET FOR INNOVATIONS: This paper presents a brief survey of the theoretical literature dealing with innovation in a market economy. The survey is organized around the following topics: first, the theory of the production, marketing and use of innovations; second, welfare aspects of innovative activities; and third, factor augmenting bias in innovation. The survey attempts to summarize the present state of knowledge concerning these topics. FACTOR BIAS AND INNOVATION: A MICROECONOMIC APPROACH: This paper is concerned with a classic question in the theory of innovations, namely, the question “does an increase in the wage rate lead towards an increase in the production and use of labor-augmenting innovations?” Section 2 of this paper contains a brief survey of the literature dealing with this question. Most of the existing literature takes a macroeconomic approach to the problem of factor augmentation bias and in addition directs its attention only at the use of innovations, with the menu of innovations available to the society being taken as given exogenously. Our approach in this paper is microeconomic, in order to deal explicitly with the issue of allocation of resources to the production of innovations and with the responsiveness of that production to the price signals provided by the factor markets. Because of aggregation problems the conclusions derived in this paper do not necessarily carry over in a direct fashion to macro models of the economy, but at least certain issues are raised by those conclusions that are relevant to the study of innovation in a macro context.