Technology and economic growth:
   steady state approximations
  Main question: how do (mainstream) models
  of economic g...
The problem of decreasing marginal
returns
 Decreasing marginal returns are necessary
 for well-behaved supply curves
 But...
Endogenous growth

 Backbone utility maximization model
 Base model (Romer)
 Convergence
 Product innovation (Quality ladd...
Utility maximization: the backbone
The Romer model

 Capital in the production function:



 Each of the producers of a variety i is a
 monopolist, for whom ...
Technological change

 An innovation is a blueprint for a new variety
 of capital
 Its value is equal to the discounted st...
The labour market

 Labour can be used for producing new
 blueprints and for producing output Y



 In equilibrium, the wa...
The growth rate



 Increasing returns: if L goes up, g goes up



 Social planner realizes a higher g
Externalities of R&D

 Lead to under-investment of R&D
 Similar to standard model of market failure
 Government can raise ...
Steady states and transition

 What happens if a country is not yet on its steady
 state?
  – It will converge to it (if t...
Two forms of β-convergence



 y* is the steady state path
 If it is identical between countries, this
 equation says the ...
Measuring β-convergence

 Steady state convergence may be
 approximated by an empirical regression
 model (Barro)
σ
A different type of convergence (σ)

 Looks at the variance of GDP per capita in a
 cross-country sample, over time
 Sig...
σ-convergence among European
Regions
A ‘neo-Schumpeterian model’

 Quality ladders & creative destruction
 The quality ladder implies a positive and
 negative ...
Welfare properties

 The social planner growth rate may be smaller or
 larger than the market growth rate
 Whether the mar...
Increasing returns to scale

 Both models so far have increasing returns to scale
 (mind the difference with marginal retu...
The Jones critique
The Jones model

 Alternative R&D equation



 Decreasing marginal returns to R&D, due to
 duplication (ψ) and ‘fishing ou...
Growth in the Jones model

 The number of R&D workers must grow in
 order to keep the growth rate fixed:


 This can only ...
The Jones model – outcomes

 Welfare properties: The market may produce
 too little or too much growth
 When the growth ra...
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Lecture 7 - Endogenous growth theory

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Lecture 7 - Endogenous growth theory

  1. 1. Technology and economic growth: steady state approximations Main question: how do (mainstream) models of economic growth represent the process? The endogenous growth models – Overview The Jones critique Semi-endogenous growth models
  2. 2. The problem of decreasing marginal returns Decreasing marginal returns are necessary for well-behaved supply curves But for long-run economic growth they pose a problem For an ever expanding economy, growth will stop as a result of decreasing marginal returns
  3. 3. Endogenous growth Backbone utility maximization model Base model (Romer) Convergence Product innovation (Quality ladders) Increasing returns to scale: a problem? Jones critique & Jones model
  4. 4. Utility maximization: the backbone
  5. 5. The Romer model Capital in the production function: Each of the producers of a variety i is a monopolist, for whom we can calculate the optimal strategy (price) and corresponding profit (per period)
  6. 6. Technological change An innovation is a blueprint for a new variety of capital Its value is equal to the discounted stream of future profits for the monopolist who sells this variety
  7. 7. The labour market Labour can be used for producing new blueprints and for producing output Y In equilibrium, the wage rate for both activities must be equal
  8. 8. The growth rate Increasing returns: if L goes up, g goes up Social planner realizes a higher g
  9. 9. Externalities of R&D Lead to under-investment of R&D Similar to standard model of market failure Government can raise welfare by R&D policy (subsidies)
  10. 10. Steady states and transition What happens if a country is not yet on its steady state? – It will converge to it (if the steady state is stable) Are steady states different or identical between countries? – Endogenous growth models say they are different (because the variables explaining growth differ) – “old” growth theory (Solow) assumes they are identical (because knowledge is supposedly freely available)
  11. 11. Two forms of β-convergence y* is the steady state path If it is identical between countries, this equation says the growth rate depends only on a constant and on initial GDP per capita – Unconditional β-convergence If it differs between countries, we may substitute the variables that influence the steady state in the equation – Conditional β-convergence
  12. 12. Measuring β-convergence Steady state convergence may be approximated by an empirical regression model (Barro)
  13. 13. σ A different type of convergence (σ) Looks at the variance of GDP per capita in a cross-country sample, over time Sigma-convergence – Coefficient of variation (standard deviation divided by mean) – Standard deviation of ln per capita GDP
  14. 14. σ-convergence among European Regions
  15. 15. A ‘neo-Schumpeterian model’ Quality ladders & creative destruction The quality ladder implies a positive and negative externality: – ‘Standing on the shoulders of giants’ – Business stealing
  16. 16. Welfare properties The social planner growth rate may be smaller or larger than the market growth rate Whether the market produces too little growth depends on ν, which is the welfare effect of a step up the quality ladder For intermediate values of ν, the market produces too little growth
  17. 17. Increasing returns to scale Both models so far have increasing returns to scale (mind the difference with marginal returns!): – If population increases, the growth rate increases Is this a reasonable proposition? (Do large countries grow faster than small countries?) The authors of these models do not think so
  18. 18. The Jones critique
  19. 19. The Jones model Alternative R&D equation Decreasing marginal returns to R&D, due to duplication (ψ) and ‘fishing out’ (φ)
  20. 20. Growth in the Jones model The number of R&D workers must grow in order to keep the growth rate fixed: This can only be achieved with a growing population (and constant R&D intensity)
  21. 21. The Jones model – outcomes Welfare properties: The market may produce too little or too much growth When the growth rate of population is zero: no growth growth rate depends on population growth, not level with strong externalities, the growth rate does not exist (infinite), externalities must be “weak”

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