The Shape of Production Function and the Direction of Technical Change

This paper views the standard production function in macroeconomics as a reduced form and derives its properties from microfoundations. The shape of this production function is governed by the distribution of ideas. If that distribution is Pareto, then two results obtain: the global production function is Cobb-Douglas, and technical change in the long run is labor-augmenting. Kortum (1997) showed that Pareto distributions are necessary if search-based idea models are to exhibit steady-state growth. Here we show that this same assumption delivers the additional results about the shape of the production function and the direction of technical change.