The paper develops a Bayesian cluster identification model to estimate the innovation pos- sibilities frontier of the OECD economies based on the probabilistic Induced Technical Change (ITC) model, a generalized version of the canonical ITC model stemming from Von Weizsäcker (2010) and Kennedy (1964). The result shows that there are multiple distinctive frontiers in the OECD economies from 1968-2009, each of which is associated with a class of economies whose technical conditions exhibit a distinctive pattern. It is observed that advanced economies with a high “level” of labor productivity and low capital productivity along with a high labor cost tend to have a low rate of cost reduction, the result from a low growth rate of labor and capital productivity. The result explains a stylized fact of economic development of advanced economies from a low-wage, labor-intensive economy to a high-wage, capital-intensive economy.
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