An intertemporal microeconomic theory of disembodied and price-induced technical progress

A theory of a wealth maximizing, capital accumulating, price taking firm facing adjustment costs and operating in the presence of disembodied and price-induced technical progress is developed. The testable implications of the extended theory are derived under mild assumptions and are thus intrinsic to the theory, not to mention observable, thereby permitting empirical scrutiny of them. The comparative dynamics properties are given in the preferred form of a symmetric and semidefinite matrix. The testable implications are contrasted with their archetypal counterparts from the adjustment cost theory. The comparison shows how (i) the introduction of disembodied and price-induced technical progress into the adjustment cost theory destroys all of its testable properties, and (ii) the disembodied and price-induced technical progress theory nests the adjustment cost theory as a special case.