Companies implement profitable innovations at fixed prices, subsequently adjusting prices and wages. Factor productivity growth rates are shown to respond positively to factor cost shares. Combined with price-setting behavior, an equilibrium is characterized by constant cost shares and productivity growth rates.
Under target-return pricing, capital productivity growth is zero at equilibrium, yielding Kaldor’s “stylized facts” of constant capital productivity and rate of profit. Equilibrium can be disturbed by changes in the pricing regime or technological potential for productivity improvement.
