Time, Quality and Growth

Abstract

Consumption requires time. Also, higher-quality goods provide more utility per unit of time, though at a higher monetary cost. Since time is limited, higher income is decreasingly spent augmenting the quantity of consumption and increasingly spent upgrading its quality. After analyzing these consumer quantity/quality choices, the paper investigates its implications for growth. As a country develops, quality growth becomes increasingly important as a component of GDP growth. Furthermore, technical progress is increasingly quality-biased. Lower income inequality as well as progressive consumption taxes raise the scale of output while reducing average quality. This is positive for growth at early stages of development but may be negative at later stages. Results are broadly consistent with evidence on the composition of GDP growth, trade patterns of vertical specialization across countries, and the non-linearity of the impact of inequality on growth.