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 one single shock explains most of the unpredictable movements in reallocation over a threeto ten-year horizon and that this shock is closely related to the investment-specific technology shock identified by long-run restrictions. The investment-specific technology shock also accounts for more than 35 percent of hours forecast errors over a twoto ten-year horizon. These findings imply that technology shocks responsible for a large portion of economic fluctuations are the main driving force behind cyclical variation in reallocation, confirming a rival or Schumpeterian nature of technological progress. ∗I thank R. Anton Braun, Thorsten Drautzburg, Shigeru Fujita, Andre Kurmann, B. Ravikumar, Harald Uhlig, Tao Zha, and especially Steven J. Davis for their helpful comments and suggestions. All remaining errors are my own. †Department of Economics, Emory University, 1602 Fishburne Drive, Atlanta, GA 30322, USA. Email: [email protected] 1