New goods and factor markets

This dissertation comprises three chapters, each exploring the role of new consumer goods in factor markets. The first two chapters deal with the capital market; the third chapter duals with the labor market. The three chapters share the same underlying theme: compared to the standard one-good setup, what are the economic effects of introducing product variety growth? How, for instance, does variety growth affect the willingness to save? How does it effect the willingness to supply labor? These are fundamental and important questions. Significantly, each chapter also has the same motivation: the predictions of the standard one-good model are grossly inconsistent with important features of the capital and labor markets.;In the first chapter, I propose an extension to the consumption capital asset pricing model to incorporate changes in consumption variety. In the model, consumption consists of different components - product groups and brands - that grow and vary in quality over time and states of nature. Expected growth in product groups raises expected future marginal utility, motivating consumers to save - thereby reducing the risk-free rate of interest. Meanwhile, variations in brand and quality growth over the business cycle make marginal utility more volatile and countercyclical - thereby raising the expected equity premium.;Following on from the first, the second chapter turns to the international capital market. Because consumption growth rates are weakly correlated across countries, standard one-good models indicate that the degree of international risk sharing is low. In this chapter, I develop a simple model which identifies another form of risk sharing: the exchange of new goods. In the model, consumers exhibit a love of variety, so the composition of consumption also determines welfare. As a result, the exchange of new goods now constitutes a potentially important form of risk sharing. To determine the degree of international risk sharing, comparing consumption growth rates is not enough.;Finally I turn to the labor market and, in particular, the incentives to supply labor. Conventional economic theory, coupled with standard preference parameters, predicts that labor supply should fall steadily over time. Yet this contradicts the fact that labor hours fall as an economy develops, but subsequently tend to stabilize. This chapter examines this pattern of labor supply over time and endogenizes labor in a model of long-run growth. It explains long-run trends in labor supply by the interaction of two countervailing forces: a rising real wage, which tends to lower labor supply; and increasing product variety, which tends to raise it. Both are manifestations of the same underlying force - innovation - and on a balanced growth path their interaction can sustain stable labor hours.