Technology Adoption and Schooling: Amplifier Income Effects of Policies Across Countries

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Neoclassical growth models require large productivity/distortion differences across countries to produce the observed disparities in the wealth of nations. In this paper I develop an otherwise very standard neoclassical model with technology adoption and schooling decisions, and show that in this environment the required productivity/distortion differences are much smaller. The schooling and technology adoption features of the model amplify the effects of productivity/distortion differences on income disparity. In particular, for a reasonable parameterization, the model generates 3 times more income disparity than a standard model. Moreover, I find that it is the interaction between the technology adoption and schooling features of the model, and not each in isolation, what accounts for most of the amplifier effect. I show that the model is consistent with the observed patterns of the schooling differences across countries. Standard neoclassical models with schooling have the implication that schooling levels are constant across economies, since wage differences affect in the same proportion the marginal benefit and the opportunity cost of schooling. In my model, average levels of schooling do vary across economies since education is more useful in modern technologies and rich economies use these technologies more intensively.