The macroeconomics of Model T

We study a model of growth and mass production. Firms undertake either product innovations that introduce new luxury goods for the rich; or process innovations that transform existing luxuries into mass products for the poor. A prototypical example for such a product cycle is the automobile. Initially, an exclusive product for the very rich, the automobile became affordable to the middle class after the introduction of Ford's Model T, "the car that put America on wheels". We present a model of non-homothetic preferences, in which the rich consume a wide range of exclusive high-quality products and the poor a more narrow range of low-quality mass products. In this framework, inequality affects the composition of R&D through price and market size effects. The inequality-growth relationship depends on how mass production affects productivity; and on the particular dimension of inequality (income gaps versus income concentration). Our model is sufficiently tractable to incorporate learning-by-doing, oligopolistic market structures, and different sources of knowledge spillovers.