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The authors study the effect of a declining labor force on the incentives to engage in labor-saving technical change and ask how this effect is influenced by institutional characteristics of the pension scheme. When labor is scarcer it becomes more expensive and innovation investments that increase labor productivity are more profitable. They incorporate this channel in a new dynamic general equilibrium model with endogenous economic growth and heterogeneous overlapping generations. They calibrate the model for the US economy. First, they establish that the net effect of a decline in population growth on the growth rate of per-capita magnitudes is positive and quantitatively significant.
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