Induced innovation revisited

This paper studies the joint evolution of factor prices, factor shares and the type of technical progress. Its main aim is to give a microeconomic foundation to the Hypothesis of Induced Innovation of the earlier literature, which assumes that the type of progress at any moment of time is chosen so as to maximize the current rate of output growth. An important conclusion of the Hypothesis of Induced Innovation is that in the long run factor-augmenting technical progress takes the form of pure labour augmentation.