Romer Model/Endogenous Growth Theory Romer vs Solow · The Solow model predicts that long-run growth is zero. · The Romer model predicts that long-run growth is positive but moderate . Nonrivalrous nature of ideas implies that production is characterized by increasing returns to scale Engine of Economic Growth · Neoclassical growth model: exogenous technological progress · Where does the technological progress that underlies this growth come from? · Endogenous growth theory or new growth theory: o focuses on the economic forces underlying technological progress o technological progress occurs as profit-maximizing firms or inventors seek newer and better mousetraps! The Basic Romer Model · Endogenizes technological progress: o search for new ideas by researchers interested in profit from their invention . The model can explain why and how the advanced countries exhibit sustained growth . Technological progress is driven by RttD in the advanced world · Y = Kª(ALY )1-a · K : capital stock, Ly: labour, A : technology (ideas) O Ly - is the labour involved with the production of output . For a given A, the prod. fn. has constant return to scale o when A is an input, there is increasing return Capital accumulation and population growth . Identical to Solow model · K = SKY - 8K · SK : saving rate L . =n L Technological Progress · A is endogenised (difference with neoclassical models) . How? by a production function for new ideas A=OLA · A : change in technologies, ideas or knowledge · A : stock of knowledge from beginning of history till today · LA: number of researchers · 0 : discovery rate of new ideas (constant?) Discovery rate of new ideas . Depends on the stock of ideas already invented? . Invention of ideas in the past raises the productivity of researchers today? 0 increasing in A . Are most obvious ideas discovered first and subsequent ideas are increasingly difficult to discover? 0 decreasing in A · 0=0 A9 · q = 0 : Productivity of researcher is independent of the stock of knowledge Technological progress . A = 0 LA`AP · As 0=0 A9
· 1 € [0, 1]: stepping on toes effect o it captures the effect of duplication of effort o same as congestion in a highway . 4 € [0, 1]: Standing on the shoulders effect o it captures knowledge spillover in research o Newton benefited from the knowledge created by Kepler . In this equation, ¢ > 0 indicates that the productivity of research increases with the stock of ideas th have already been discovered; ¢ < 0 corresponds to the "fishing-out" case in which the fish become harder to catch over time . Finally, o = 0 indicates that the tendency for the most obvious ideas to be discovered first exactly offsets the fact that old ideas may facilitate the discovery of new ideas-that is, the productivity of research is independent of the stock of knowledge. . > < 1 may reflect an externality associated