Journal of Economic Development, vol. 28, issue 1 (2003) pp. 1-22
This paper attempts to answer the question: how does the income gap between workers and capitalists evolve over time in the period of ITC and globalization increasing international technology creation and transfers? The model bases on a Romer's type of variety expansion of intermediate goods. We assume that there are two types of agents supplying two different types of factors. Workers supply specific skill weighted labor by accumulating their specific skills that depreciate with an introduction of new intermediate goods. The other type of agents, R&D agents, produce and sell new varieties of intermediate goods monopolistically after inventing them. The model yields: depending on the elasticity of substitution between the two factors and on the value of the factor share, an increase in the efficiency of technology creation (or lowering the barriers on the imports of intermediate goods) affects the growth rates of workers' and R&D agents' average income differently. First, if the elasticity of substitution is greater than one, in a certain stage of development, an advance in ITC or "globalization" increases the growth rate of R&D agents' average income, while it decreases that of workers'. Thus, the "Digital Divide" happens. Conversely, if the elasticity of substitution is less than one, the result will be reversed. These results are intuitively obvious. Second, if an economy develops from a higher factor share of the workers to a sufficiently lower one, the growth rates of GNP, and the average incomes of both workers and R&D agents increase over time.
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