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Zvi Griliches and the Economics of Technology Diffusion: Linking Innovation Adoption, Lagged Investments, and Productivity Growth

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Zvi Griliches and the Economics of Technology Diffusion: Linking Innovation Adoption, Lagged Investments, and Productivity Growth This work is distributed as a Discussion Paper by the STANFORD INSTITUTE FOR ECONOMIC POLICY RESEARCH SIEPR Discussion Paper No. 15-005 Zvi Griliches and the Economics of Technology Diffusion: Linking innovation adoption, lagged investments, and productivity growth By Paul A. David Stanford Institute for Economic Policy Research Stanford University Stanford, CA 94305 (650) 725-1874 The Stanford Institute for Economic Policy Research at Stanford University supports research bearing on economic and public policy issues. The SIEPR Discussion Paper Series reports on research and policy analysis conducted by researchers affiliated with the Institute. Working papers in this series reflect the views of the authors and not necessarily those of the Stanford Institute for Economic Policy Research or Stanford University Zvi Griliches and the Economics of Technology Diffusion: Linking innovation adoption, lagged investments, and productivity growth By Paul A. David First version: August 2003 Second version: December 2005 Third version: March 31 2009 Fourth version: March 20, 2011 This version: April 4, 2015 Acknowledgements The present version is a revision of the Stanford Institute for Economic Policy Research (SIEPR) Discussion Paper No. 10‐029 (March), 2011. The first version of this work was presented to the Conference on R&D, Education and Productivity, held in Memory of Zvi Griliches (1930 –1999) on 25‐27th, August 2003 at CarrJ des Sciences, Ministère de la Recherche, Paris, France. Gabriel Goddard furnished characteristically swift and accurate assistance with the simulations, and the graphics based upon them that appear in Section 4. I am grateful to Wesley Cohen for his perceptive discussion of the conference version, particularly in regard to the supply‐side facet of Griliches’ 1957 article in Econometrica. The wise counsel and extraordinary patience of Jacques Mairesse and Manuel Trajtenberg in their capacities as editors of the 2003 conference proceedings was vital in launching me on the extended course of revisions that has brought the paper to its present state. At the outset of that journey I had the benefit of many helpful suggestions by two anonymous referees for the abridgment and thorough restructuring of the conference paper, only some of which (evidently) have been implemented. More recently, I incurred further debts, firstly, to Bronwyn Hall for comments that clarified several points regarding Griliches’ redirection of his empirical research in the early 1970’s away from explicit treatment of diffusion phenomena, and toward aspects of technological change and the impact of R&D on firm‐level productivity, as well as improving the appearance of Figure 5. Subsequent presentations of the material to the MERIT Workshop on Information Technology and New Industry and Labour Market Dynamics (held on 3‐4 June 2004) at the University of Maastricht, and at the seminar of the Eindhoven Centre for Innovation Studies (on 17 November 2004) at Eindhoven University of Technology, provided stimuli from Bart Verspagen and others to undertake still more improvements – which contributed to further lengthen the paper. Still more recent conversations with H. Peyton Young on the general class “heterogeneous threshold” models of adoption have contributed to the present exposition of the challenges posed to empirical identification of alternative diffusion mechanisms. My intellectual debts to Trond Olson, Paul Stoneman and Gavin Wright, whose contributions to our co‐authored works (referenced herein) have been important in shaping my research on this subject to a degree that the footnote citations inadequately convey. While grateful to all those who have offered their help, I insist that none should be held to blame for whatever defects and deficiencies nevertheless persist in these pages. ABSTRACT 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 t ree foregoing dynamic phenomena diffusion, durable investment lags, and TFP growth – were the topics of Griliches’ three most widely journal articles, respectively. The connections h among them have not been – generally noticed by economists, and, indeed they remained implicit his writings until late in his career, cited when he emphasized the diffusion‐productivity nexus as a key proximate determinant of the pace of economic growth – a perception whose importance remainsin 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. Keywords: technology adoption, innovations, diffusion, investment lags, learning‐by‐ doing, heterogeneous adopters, contagion model, threshold model, micro‐macro models, labor productivity and TFP growth‐surges. JEL Classification Nos.: D22, D24, O33, O4. Contact Author: Paul A. David [email protected] ‐ 1 ‐ Zvi Griliches and the Economics of Technology Diffusion: Linking innovation adoption, lagged investments, and productivity growth 1. Introduction This essay considers the scientific legacy of Zvi Griliches’ contribution to the economic analysis of the diffusion of technological innovations by examining the relationship between his 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. Those developments have exposed the ways in which structural conditions at the micro‐ level on the demand side of markets for new process innovations, and dynamic feedbacks affecting the supply side of the markets for innovative products can interact to shape the specifics of diffusion phenomena that are observed at the level of industries and sectors. Further elaboration of this analytical perspective brings into clearer focus the micro‐to‐macro connections between diffusion and the lagged behavior of aggregate investment in capital‐embodied innovations, as well as the impact of diffusion dynamics on the pace of growth of aggregate total factor productivity (TFP). Directing the attention of empirical and theoretical research to examine the microeconomic mechanisms that underlie technological ‘transitions’ driven by the diffusion of major innovations has revealed processes that can generate wave‐like surges of innovation‐embodying capital accumulation, and corresponding waves in the growth rates of industrial and sectoral total factor productivity (TFP). The impetus his pioneering study of hybrid corn imparted to subsequent research aimed at identifying the roles of structural conditions and dynamic linkages among the population of potential adopters and the suppliers of innovation‐embodying producer goods, deserve recognition among the most important enduring legacies of Griliches’ contributions to modern economics. 1.1 Diffusion, distributed lags and the growth of measured TFP: Zvi Griliches’ three biggest journal publication “hits” The three most widely cited journal articles by Zvi Griliches deal, respectively, with the economics of the diffusion of technological innovations, the econometrics of distributed lags and the sources of measured changes in total factor productivity (a collaborative paper with Dale Jorgenson). Obviously, citation statistics are but one means of gauging the intellectual impact of research contributions – and a limited one at that.1 Nevertheless, it is testimony to the significance of the main subject of this essay that the 1957 Econometrica paper on the introduction and acceptance of hybrid corn among U.S. farmers comes first in the rank ordering of the many journal articles whose cumulative annual journal citations have been compiled in Diamond’s (2003) survey of Griliches’ contributions to the economics of technology and growth. Moreover, the remarkable fact that the annual flow of citations to this particular article has continued to trend upwards throughout the 1 The three papers top the all‐time citation ranking of 110 journal articles
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