Technological Change and Reallocation

This paper considers a technological change that can be utilized only by production units adapting to the new technology. A simple firm dynamics model is used to show such an innovation enhances reallocation, whereas a technological advance that is available to all production units does not. This implication is used in structural vector autoregressions to study the driving force behind cyclical movements in reallocation and the rival/nonrival nature of technology. This paper finds that technology shocks fostering an ongoing reallocation are responsible for a large portion of economic fluctuations, confirming a rival or Schumpeterian nature of technological progress.