This proposal addresses one of the most salient puzzles in modern economics: the simultaneous and sustained increase in both the supply of skilled labor and the skill premium. Standard economic models, which treat technology as an exogenous force, cannot account for this trend. This research program is built on the premise that the theory of directed technological change offers the most compelling resolution. By treating the bias of innovation as an endogenous response to economic incentives, this framework explains how a rising supply of skills can induce the very technological changes that favor skilled workers.

The proposed research agenda involves a crucial extension of the canonical directed technological change model to explicitly incorporate physical capital as a third factor of production. This extension will allow for a formal analysis of how capital accumulation, interacting with the substitutability between all three factors, shapes the long-run direction of innovation and the distribution of income. Through a combination of rigorous theoretical modeling and quantitative simulation, this project will test specific hypotheses regarding the conditions for a rising skill premium and the endogenous emergence of balanced growth.

The successful completion of this research promises to significantly advance our understanding of the fundamental relationship between technological change, economic growth, and income inequality. By providing a richer, more dynamic model of the forces shaping our economic landscape, this project will offer critical insights for both economic theory and public policy, thereby making a compelling case for its support.