ABSTRACT

A variety of arguments have been advanced as to why growth models with increasing returns are superior to those with diminishing or constant returns. From a theoretical stand point, the endogenous versus exogenous nature of economic growth is the principal one. Romer (1994), for example, says that the fact that ‘technical advance comes from things that people do’ and is not merely ‘a function of elapsed calendar time’, argues against concave models of ‘exogenous’ technological change. In this interpretation, endogeneity means that technological innovations should come from ‘things people do’. In this chapter we focus on the issue of ‘endogeneity’ of growth in a concave setting. We distinguish between growth due to the accumulation of factors, and growth in the total productivity of such factors, which we refer to as technological advance. To be concrete, we will propose that the growth rate or the rate of technological advance are endogenous if they are affected in a non-trivial way by changes in the rate of intertemporal substitution in consumption. Notice that in the Solow growth model, neither the growth rate nor the rate of technological advance are endogenous in this sense. In Rebelo’s (1991) AK model, the growth rate is endogenous, but the rate o f technological advance is not. On the other hand, in models with increasing returns such as those of Lucas (1988) or Romer (1990), not only is the growth rate endogenous, but so is the growth of total factor productivity.