Why do economies grow at all?

This topic is concerned with theory. What are the conditions under which an economy will grow? Does it require accumulation of factors like capital, or innovation of new ways of using those factors? As innovation and productivity tend to be seen as the main empirical drivers of growth, under what conditions will there be innovation? This gets into the question of what market conditions provide the incentives to innovate, and it turns out that competition - free entry, zero profits, price-taking - is not the best way to draw out innovations, even if it is the most efficient way to organize production given a set of technologies on hand. Thinking about this really gets to the heart of what drives growth: non-rival ideas combined with some excludability.

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Academic References

  1. Acemoglu, D. and Guerrieri, V. (2008) “Capital Deepening and Nonbalanced Economic Growth,” Journal of Political Economy, 116(3), pp. 467–498. Available at: Link.
  2. Aghion, P., Akcigit, U. and Howitt, P. (2014) “What Do We Learn From Schumpeterian Growth Theory?,” Handbook of Economic Growth, 2, pp. 515–563. doi: Link.
    • Abstract

      Schumpeterian growth theory has operationalized Schumpeter’s notion of creative destruction by developing models based on this concept. These models shed light on several aspects of the growth process that could not be properly addressed by alternative theories. In this survey, we focus on four important aspects, namely: (i) the role of competition and market structure; (ii) firm dynamics; (iii) the relationship between growth and development with the notion of appropriate growth institutions; and (iv) the emergence and impact of long-term technological waves. In each case, Schumpeterian growth theory delivers predictions that distinguish it from other growth models and which can be tested using micro data.

  3. Aghion, P. et al. (2005) “Competition and Innovation: a Inverted-U Relationship,” Quarterly Journal of Economics, 120(2), pp. 701–728.
    • Abstract

      This paper investigates the relationship between product market competition and innovation. We find strong evidence of an inverted-U relationship using panel data. We develop a model where competition discourages laggard firms from innovating but encourages neck-and-neck firms to innovate. Together with the effect of competition on the equilibrium industry structure, these generate an inverted-U. Two additional predictions of the model-that the average technological distance between leaders and followers increases with competition, and that the inverted-U is steeper when industries are more neck-and-neck-are both supported by the data.

  4. Aghion, P. and Howitt, P. (2009) The Economics of Growth. MIT Press.
  5. Aghion, P. and Howitt, P. (1992) “A Model of Growth through Creative Destruction,” Econometrica, 60(2), pp. 323–351. Available at: Link.
    • Abstract

      A model of endogenous growth is developed in which growth is driven by vertical innovations that involve creative destruction. Equilibrium is determined by a forward-looking difference equation, according to which the amount of research in any period depends negatively upon the amount expected next period. The paper analyzes positive and normative properties of stationary equilibria, and shows conditions for the existence of cyclical equilibria and no-growth traps. The growth rate may be more or less than optimal because a business-stealing effect counteracts the usual spillover and appropriability effects. In addition, innovations tend to be too small. Copyright 1992 by The Econometric Society.

  6. Becker, G. S., Murphy, K. M. and Tamura, R. (1990) “Human Capital, Fertility, and Economic Growth,” Journal of Political Economy, 98(5), pp. S12–37. Available at: Link.
    • Abstract

      The authors’ analysis of growth assumes endogenous fertility and a rising rate of return on human capital as the stock of human capital increases. When human capital is abundant, rates of return on human capital investments are high relative to rates of return on children, whereas, when human capital is scarce, rates of return on human capital are low relative to those on children. As a result, societies with limited human capital choose large families and invest little in each member; those with abundant human capital do the opposite. This leads to two stable steady states. One has large families and little human capital; the other has small families and perhaps growing human and physical capital. Copyright 1990 by University of Chicago Press.

  7. Becker, G. S., Glaeser, E. L. and Murphy, K. M. (1999) “Population and Economic Growth,” American Economic Review, 89(2), pp. 145–149. doi: 10.1257/aer.89.2.145.
  8. Dalgaard, C.-J. and Kreiner, C. T. (2001) “Is declining productivity inevitable?,” Journal of Economic Growth. Springer, 6(3), pp. 187–203.
    • Abstract

      Fertility has been declining on all continents for the last couple of decades and this development is expected to continue in the future. Prevailing innovation-based growth theories imply, as a consequence of scale effects from the size of population, that such demographic changes will lead to a major slowdown in productivity growth. In this paper we challenge this pessimistic view of the future. By allowing for endogenous human capital in a basic R&D driven growth model we develop a theory of scale-invariant endogenous growth according to which population growth is neither necessary nor conductive for economic growth.

  9. Dinopoulos, E. and Thompson, P. (1993) “Schumpeterian Growth without Scale Effects,” Journal of Economic Growth, 3(4), pp. 313–335.
    • Abstract

      We incorporate population growth into the model of trustified capitalism, with vertical and horizontal product differentiation, developed by Thompson and Waldo (1994) and generate endogenous long-run Schumpeterian growth without scale effects. Our model extends the analysis of Young (1998) and overturns some key policy and welfare implications of his model. The transitional dynamics of the model can account for the presence of scale effects in preindustrial and early industrial eras.

  10. Doepke, M. (2004) “Accounting for fertility decline during the transition to growth,” Journal of Economic Growth. Springer, 9(3), pp. 347–383.
    • Abstract

      In every developed country, the economic transition from pre-industrial stagnation to modern growth was accompanied by a demographic transition from high to low fertility. Even though the overall pattern is repeated, there are large cross-country variations in the timing and speed of the demographic transition. What accounts for falling fertility during the transition to growth? To answer this question, this paper develops a unified growth model that delivers a transition from stagnation to growth, accompanied by declining fertility. The model is used to determine whether government policies that affect the opportunity cost of education can account for cross-country variations in fertility decline. Among the policies considered, education subsidies are found to have only minor effects, while accounting for child labor regulation is crucial. Apart from influencing fertility, the policies also determine the evolution of the income distribution in the course of development.

  11. Erosa, A., Korshkova, T. and Restuccia, D. (2010) “How Important is Human Capital? A Quantitative Theory Assessment of World Income Inequality,” Review of Economic Studies, 77(4), pp. 1421–49.
    • Abstract

      We build a model of heterogeneous individuals-who make investments in schooling quantity and quality-to quantify the importance of differences in human capital vs. total factor productivity (TFP) in explaining the variation in "per capita" income across countries. The production of human capital requires expenditures and time inputs; the relative importance of these inputs determines the predictions of the theory for inequality both within and across countries. We discipline our quantitative assessment with a calibration firmly grounded on US micro evidence. Since in our calibrated model economy human capital production requires a significant amount of expenditures, TFP changes affect disproportionately the benefits and costs of human capital accumulation. Our main finding is that human capital accumulation strongly amplifies TFP differences across countries: to explain a 20-fold difference in the output per worker, the model requires a 5-fold difference in the TFP of the tradable sector, vs. an 18-fold difference if human capital is fixed across countries.

  12. Galor, O. (2012) “The demographic transition: causes and consequences,” Cliometrica, Journal of Historical Economics and Econometric History, 6(1), pp. 1–28. Available at: Link.
    • Abstract

      This paper develops the theoretical foundations and the testable implications of the various mechanisms that have been proposed as possible triggers for the demographic transition. Moreover, it examines the empirical validity of each of the theories and their significance for the understanding of the transition from stagnation to growth. The analysis suggests that the rise in the demand for human capital in the process of development was the main trigger for the decline in fertility and the transition to modern growth.

  13. Galor, O. and Moav, O. (2004) “From physical to human capital accumulation: Inequality and the process of development,” Review of Economic Studies. Wiley Online Library, 71(4), pp. 1001–1026.
    • Abstract

      This paper develops a growth theory that captures the replacement of physical capital accumulation by human capital accumulation as a prime engine of growth along the process of development. It argues that the positive impact of inequality on the growth process was reversed in this process. In early stages of the Industrial Revolution, when physical capital accumulation was the prime source of growth, inequality stimulated development by channelling resources towards individuals with a higher propensity to save. As human capital emerged as a growth engine, equality alleviated adverse effects of credit constraints on human capital accumulation, stimulating the growth process.

  14. Galor, O. and Weil, D. N. (2000) “Population, technology, and growth: From Malthusian stagnation to the demographic transition and beyond,” The American Economic Review. JSTOR, 90(4), pp. 806–828. Available at: Link.
    • Abstract

      This paper develops a unified growth model that captures the historical evolution of population, technology, and output. It encompasses the endogenous transition between three regimes that have characterized economic development. The economy evolves from a Malthusian regime, where technological progress is slow and population growth prevents any sustained rise in income per capita, into a Post-Malthusian regime, where technological progress rises and population growth absorbs only part of output growth. Ultimately, a demographic transition reverses the positive relationship between income and population growth, and the economy enters a Modern Growth regime, with reduced population growth and sustained income growth.

  15. Galor, O. and Zeira, J. (1993) “Income distribution and macroeconomics,” The Review of Economic Studies. Oxford University Press, 60(1), pp. 35–52.
    • Abstract

      This paper analyzes the role of wealth distribution in macroeconomics through investment in human capital. In the presen ce of credit markets’ imperfections and indivisibilities in investment in human capital, the initial distribution of wealth affects aggregate output and investment both in the short and in the long run, as ther e are multiple steady states. This paper, therefore, provides an additional explanation for the persistent differences in per-capita output across countries. Furthermore, the paper shows that cross-country differences in macroeconomic adjustment to aggregate shocks can be attributed, among other factors, to differences in wea lth and income distribution across countries.

  16. Garcia-Penalosa, C., Caroli, E. and Aghion, P. (1999) “Inequality and Economic Growth: The Perspective of the New Growth Theories,” Journal of Economic Literature, 37(4), pp. 1615–1660. Available at: Link.
    • Abstract

      We analyze the relationship between inequality and economic growth from two directions. The first part of the survey examines the effect of inequality on growth, showing that when capital markets are imperfect, there is not necessarily a trade-off between equity and efficiency. It therefore provides an explanation for two recent empirical findings, namely, the negative impact of inequality and the positive effect of redistribution upon growth. The second part analyzes several mechanisms whereby growth may increase wage inequality, both across and within education cohorts. Technical change, and in particular the implementation of "General Purpose Technologies," stands as a crucial factor in explaining the recent upsurge in wage inequality.

  17. Houthakker, H. S. (1955) “The Pareto Distribution and the Cobb-Douglas Production Function in Activity Analysis,” Review of Economic Studies, 23(1), pp. 27–31. Available at: Link.
    • Abstract

      No abstract is available for this item.

  18. Howitt, P. (1999) “Steady Endogenous Growth with Population and R & D Inputs Growing,” Journal of Political Economy. The University of Chicago Press, 107(4), pp. 715–730. Available at: Link.
    • Abstract

      This paper presents a Schumpeterian endogenous growth model in which a steady state exists with a constant growth rate even though population and the inputs to R. & D. are growing. The scale effect of rising population is nullified by product proliferation that fragments the growing demand for intermediate prodcuts, thus preventing the reward to any specific innovation from rising with population. All the ususal comparitive statics results of Schumpeterian growth theory are valid, including the positive effect of R. & D. subsidies on growth.

  19. Hoxha, I., Kalemli-Ozcan, S. and Vollrath, D. (2013) “How big are the gains from international financial integration?,” Journal of Development Economics, 103(C), pp. 90–98. Available at: Link.   Paper
    • Abstract

      The literature has shown that the implied welfare gains from financial integration are very small. We revisit these findings and document that welfare gains are substantial if capital goods are not perfect substitutes. We use a model of optimal savings where the elasticity of substitution between capital varieties is less than infinity, but more than the value that would generate endogenous growth. This production structure is consistent with empirical estimates of the actual elasticity of substitution between capital types, as well as with the relatively slow speed of convergence documented in the literature. Calibrating the model, welfare gains from financial integration are equivalent to a 9% increase in consumption for the median country, and 14% for the most capital-scarce. This rises substantially if capital’s share in output increases even modestly above 0.3, and remains large if inflows of foreign capital are limited to a fraction of the existing capital stock.

  20. Jones, C. I. (2005) “The Shape of the Production Function and the Direction of Technical Change,” Quarterly Journal of Economics, 120(2), pp. 517–549.
    • Abstract

      This paper views the standard production function in macroeconomics as a reduced form and derives its properties from microfoundations. The shape of this production function is governed by the distribution of ideas. If that distribution is Pareto, then two results obtain: the global production function is Cobb-Douglas, and technical change in the long run is labor-augmenting. Kortum (1997) showed that Pareto distributions are necessary if search-based idea models are to exhibit steady-state growth. Here we show that this same assumption delivers the additional results about the shape of the production function and the direction of technical change.

  21. Jones, C. I. (2002) “Sources of U.S. Economic Growth in a World of Ideas,” American Economic Review, 92(1), pp. 220–239.
    • Abstract

      Rising educational attainment and research intensity in recent decades suggest that the U.S. economy is far from its steady state. This paper develops a model reconciling these facts with the stability of U.S. growth rates. In the model, long-run growth arises from the worldwide discovery of ideas, which depends on population growth. Nevertheless, constant growth can temporarily proceed at a faster rate, provided research intensity and educational attainment rise steadily over time. Growth accounting reveals that these factors explain 80 percent of recent U.S. growth, with less than 20 percent coming from world population growth.

  22. Jones, C. I. (1995) “Time Series Test of Endogenous Growth Models,” Quarterly Journal of Economics, 110, pp. 495–525.
    • Abstract

      According to endogenous growth theory, permanent changes in certain policy variables have permanent effects on the rate of economic growth. Empirically, however, U.S. growth rates exhibit no large persistent changes. Therefore, the determinants of long-run growth highlighted by a specific growth model must similarly exhibit no large persistent changes or the persistent movement in these variables must be offsetting. Otherwise, the growth model is inconsistent with time series evidence. This paper argues that many AK-style models and R&D-based models of endogenous growth are rejected by this criterion. The rejection of the R&D-based models is particularly strong.

  23. Jones, C. I. (1995) “R&D-Based Models of Economics Growth,” Journal of Political Economy, 103, pp. 759–784.
    • Abstract

      This paper argues that the ’scale effects’ prediction of many recent R&D-based models of growth is inconsistent with the time-series evidence from industrialized economies. A modified version of the Romer model that is consistent with this evidence is proposed, but the extended model alters a key implication usually found in endogenous growth theory. Although growth in the extended model is generated endogenously through R&D, the long-run growth rate depends only on parameters that are usually taken to be exogenous, including the rate of population growth.

  24. Klump, R. and Grandville, O. de la (2000) “Economic Growth and the Elasticity of Substitution: Two Theorems and Some Suggestions,” The American Economic Review, 90(1), pp. 282–291.
  25. Kortum, S. S. (1997) “Research, Patenting, and Technological Change,” Econometrica. The Econometric Society, 65(6), pp. 1389–1419. Available at: Link.
    • Abstract

      This paper develops a search-theoretic model of technological change that accounts for some puzzling trends in industrial research, patenting, and productivity growth. In the model, researchers sample from probability distributions of potential new production techniques. Past research generates a technological frontier representing the best techniques for producing each good in the economy. Technological breakthroughs, resulting in patents, become increasingly hard to find as the technological frontier advances. This explains why patenting has been roughly constant as research employment has risen sharply over the last forty years. Productivity is determined by the position of the technological frontier and hence by the stock of past research. If researchers sample from Pareto distributions, then productivity growth is proportional to the growth of the research stock. The Pareto specification accounts for why productivity growth has neither risen as research employment has grown nor fallen as patenting has failed to grow. The growth of research employment itself is driven, in equilibrium, by population growth. Calibrating the model’s four parameters, the implied social return to research is over twenty percent.

  26. Kremer, M. (1993) “Population Growth and Technological Change: One Million B.C. to 1990,” The Quarterly Journal of Economics, 108(3), pp. 681–716. Available at: Link.
    • Abstract

      The nonrivalry of technology, as modeled in the endogenous growth literature, implies that high population spurs technological change. This paper constructs and empirically tests a model of long-run world population growth combining this implication with the Malthusian assumption that technology limits population. The model predicts that over most of history, the growth rate of population will be proportional to its level. Empirical tests support this prediction and show that historically, among societies with no possibility for technological contact, those with larger initial populations have had faster technological change and population growth. Copyright 1993, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

  27. Lee, R. D. (1988) “Induced population growth and induced technological progress,” Mathematical Population Studies, 1(3), pp. 265–288. Available at: Link.
  28. Murphy, K. M., Shleifer, A. and Vishny, R. W. (1989) “Income Distribution, Market Size, and Industrialization,” The Quarterly Journal of Economics, 104(3), pp. 537–64. Available at: Link.
    • Abstract

      When world trade is costly, a country can profitably industrialize only if its domestic markets are large enough. In such a country, for increasing returns technologies to break even, sales must be high enough to cover fixed setup costs. The authors suggest two conditions conducive to industrialization. First, a leading sector, such as agriculture or exports, must grow and provide the source of autonomous demand for manufactures. Second, income generated by this leading sector must be broadly enough distributed that it materializes as demand for a broad range of domestic manufactures. These conditions have been important in several historical growth episodes. Copyright 1989, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

  29. Peretto, P. (1998) “Technological Change and Population Growth,” Journal of Economic Growth, 3(4), pp. 283–311.
    • Abstract

      What is the relationship between the rate of population growth and the rate of technological change? To answer this question, I discuss a model where increasing returns generate long-run growth but where the scale effect is absent. More precisely, the model predicts that steady-state productivity growth does not depend on population size because an increase in population size leads to entry. The resulting crowding-in effect generates dispersion of R&D resources across firms and offsets the positive effect of the scale of the economy on the returns to R&D. Changes in population size have only transitory effects on productivity growth. This desirable property allows me to introduce population growth in the model and study the effects of demographic shocks. The predicted patterns of growth, entry, and change in industrial structure match the experience of several industrialized countries. In addition, they match several of the empirical observations cited as evidence against standard models of endogenous technological change.

  30. Peretto, P. and Valente, S. (2015) “Growth on a finite planet: resources, technology and population in the long run,” Journal of Economic Growth, 20(3), pp. 305–331. doi: 10.1007/s10887-015-9118-z.
    • Abstract

      We study the interactions between technological change, resource scarcity and population dynamics in a Schumpeterian model with endogenous fertility. We find a steady state in which population is constant and determined by resource scarcity while income grows exponentially. If labor and resources are substitutes in production, income and fertility dynamics are stable and the steady state is the global attractor of the system. If labor and resources are complements, income and fertility dynamics are unstable and drive the economy towards either demographic explosion or collapse. We calibrate the model numerically to match past US data on fertility and land scarcity, obtaining future scenarios for the current century and quantifying the response of fertility and productivity to exogenous shocks. Copyright Springer Science+Business Media New York 2015

  31. Romer, P. M. (1990) “Endogenous Technological Change,” Journal of Political Economy. The University of Chicago Press, 98(5), pp. pp. S71–S102. Available at: Link.
    • Abstract

      Growth in this model is driven by technological change that arises from intentional investment decisions made by profit-maximizing agents. The distinguishing feature of the technology as an input is that it is neither a conventional good nor a public good; it is a nonrival, partially excludable good. Because of the nonconvexity introduced by a nonrival good, price-taking competition cannot be supported. Instead, the equilibrium is one with monopolistic competition. The main conclusions are that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth.

  32. Romer, P. M. (1986) “Increasing Returns and Long-Run Growth,” Journal of Political Economy. The University of Chicago Press, 94(5), pp. pp. 1002–1037. Available at: Link.
    • Abstract

      This paper presents a fully specified model of long-run growth in which knowledge is assumed to be an input in production that has increasing marginal productivity. It is essentially a competitive equilibrium model with endogenous technological change. In contrast to models based on diminishing returns, growth rates can be increasing over time, the effects of small disturbances can be amplified by the actions of private agents, and large countries may always grow faster than small countries. Long-run evidence is offered in support of the empirical relevance of these possibilities.

  33. Schmitz, J. A., Jr. (2005) “What Determines Productivity? Lessons from the Dramatic Recovery of the U.S. and Canadian Iron Ore Industries Following Their Early 1980s Crisis,” Journal of Political Economy, 113(3), pp. 582–625. Available at: Link.
  34. Segerstrom, P. S. (1998) “Endogenous Growth without Scale Effects,” The American Economic Review. American Economic Association, 88(5), pp. 1290–1310. Available at: Link.
    • Abstract

      This paper presents a simple R&D-driven endogenous growth model to shed light on some puzzling economic trends. The model can account for why patent statistics have been roughly constant even though R&D employment has risen sharply over the last 30 years. The model also illuminates why steadily increasing R&D effort has not led to any upward trend in economic growth rates, as is predicted by earlier R&D-driven endogenous growth models with the "scale effect" property.

  35. Segerstrom, P. S., Anant, T. C. A. and Dinopoulos, E. (1990) “A Schumpeterian Model of the Product Life Cycle,” The American Economic Review. American Economic Association, 80(5), pp. 1077–1091. Available at: Link.
    • Abstract

      This paper presents a dynamic general equilibrium model of North-South trade in which research and development races between firms determine the rate of product innovation in the North. Tariffs designed to protect dying industries in the North from Southern competition reduce the steady-state number of dominant firms in the North, reduce the rate of product innovation, and increase the relative wage of Northern workers.

  36. Solow, R. M. (1956) “A Contribution to the Theory of Economic Growth,” The Quarterly Journal of Economics. Oxford University Press, 70(1), pp. pp. 65–94. Available at: Link.
    • Abstract

      I. Introduction, 65.–II. A model of long-run growth, 66.–III. Possible growth patterns, 68.–IV. Examples, 73.–V. Behavior of interest and wage rates, 78.–VI. Extensions, 85.–VII. Qualifications, 91.

  37. Tsiang, S. C. (1964) “A Model of Economic Growth in Rostovian Stages,” Econometrica. [Wiley, Econometric Society], 32(4), pp. 619–648. Available at: Link.
    • Abstract

      This paper gives a non-linear growth model, which explains the development of an economy through stages somewhat similar to the Rostovian stages. Non-linearity is introduced by including the inaugmentable factor of land or natural resources in the production function along with labor and capital, and by recognizing that net saving is not a linear homogeneous function of income alone, but might be affected by the distribution of income and the interest rate and tends to be negative when per capita income is very low. Furthermore, population growth is assumed to follow a Neo-Malthusian pattern. The effects of non-neutral as well as neutral technical progress are discussed in this paper.

  38. Tsiddon, D. (1992) “A Moral Hazard Trap to Growth,” International Economic Review, 33(2), pp. 299–321. Available at: Link.
    • Abstract

      This paper studies the consequences of asymmetric information in the investment sector upon economic growth. In this paper, the information asymmetry generates a moral hazard problem. This moral hazard problem restricts financial arrangements. It is shown that these restrictions make even the long-run competitive equilibrium income dependent upon history. This result also holds in case there is perfect capital mobility. However, when there is capital mobility, the government may be able to intervene in a Pareto improving way. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

  39. Williams, H. L. (2017) How Do Patents Affect Research Investments? NBER Working Papers 23088. National Bureau of Economic Research, Inc. Available at: Link.
    • Abstract

      While patent systems have been widely used both historically and internationally, there is nonetheless a tremendous amount of controversy over whether patent systems – in practice – improve the alignment between private returns and social contributions. In this paper, I describe three parameters – how the disclosure function affects research investments, how patent strength affects research investments in new technologies, and how patents on existing technologies affect follow-on innovation – needed to inform the question of how patents affect research investments, and review the available evidence which has attempted to empirically estimate these parameters.

  40. Yi, K.-M. (2003) “Can Vertical Specialization Explain the Growth of World Trade?,” Journal of Political Economy, 111(1), pp. 52–102. Available at: Link.
    • Abstract

      The striking growth in the trade share of output is one of the most important developments in the world economy since World War II. Two features of this growth present challenges to the standard trade models. First, the growth is generally thought to have been generated by falling tariff barriers worldwide. But tariff barriers have decreased by only about 11 percentage points since the early 1960s; the standard models cannot explain the growth of trade without assuming counterfactually large elasticities of substitution between goods. Second, tariff declines were much larger prior to the mid 1980s than after, and yet, trade growth was smaller in the earlier period than in the later period. The standard models have difficulty generating this nonlinear feature. This paper develops a two-country dynamic Ricardian trade model that offers a resolution of these two puzzles. The key idea embedded in this model is vertical specialization, which occurs when countries specialize only in particular stages of a good’s production sequence. The model generates a nonlinear trade response to tariff reductions and can explain over 50 percent of the growth of trade. Finally, the model has important implications for the gains from trade.

  41. Young, A. (1998) “Growth without Scale Effects,” Journal of Political Economy. The University of Chicago Press, 106(1), pp. 41–63. Available at: Link.
    • Abstract

      An increase in the size (scale) of an economy increases the total quantity of rents that can be captured by successful innovators, which, in equilibrium, should lead to a rise in innovative activity. Conventional wisdom and the theoretical predictions of models of endogenous innovation suggest that this increased research effort should lead to more rapid growth. As noted by Charles Jones, this prediction is at odds with the postwar experience of the OECD, where the growth of the market has indeed led to an increased R & D effort that, however, has been translated into stagnat or declining growth rates. Drawing on the remarkable insights of the museum curator Seabury C. Gilfillan, this paper modifies models of endogenous innovation to allow for the possibility that a rise in the profitability of innovative activity could lead to an increased variety of differentiated solutions to similar problems. An increased variety of technologies (e.g., an increase in the number and types of contraceptives) will increase the level of utility of the average consumer. If, however, continued improvement of this increased variety of technologies requires increased research input, a rise in the scale of the market could raise the equilibrium quantity of R & D without increasing the economy’s growth rate.

  42. Young, A. (1991) “Learning by Doing and the Dynamic Effects of International Trade,” The Quarterly Journal of Economics, 106(2), pp. 369–405. Available at: Link.
  43. Zweimuller, J. (2000) “Schumpeterian Entrepreneurs Meet Engel’s Law: The Impact of Inequality on Innovation-Driven Growth,” Journal of Economic Growth, 5(2), pp. 185–206. Available at: Link.
    • Abstract

      This article analyzes the impact of inequality on growth when consumers have hierarchic preferences and technical progress is driven by innovations. With hierarchic preferences, the poor consume predominantly basic goods, whereas the rich consume also luxury goods. Inequality has an impact on growth because it affects the level and the dynamics of an innovator’s demand. It is shown that redistribution from very rich to very poor consumers can be beneficial for growth. In general, the growth effect depends on the nature of redistribution. Due to a demand externality from R&D activities, multiple equilibria are possible. Copyright 2000 by Kluwer Academic Publishers

  44. Croix, D. de la and Doepke, M. (2003) “Inequality and Growth: Why Differential Fertility Matters,” American Economic Review, 93(4), pp. 1091–1113. Available at: Link.
    • Abstract

      We develop a new theoretical link between inequality and growth. In our model, fertility and education decisions are interdependent. Poor parents decide to have many children and invest little in education. A mean-preserving spread in the income distribution increases the fertility differential between the rich and the poor, which implies that more weight gets placed on families who provide little education. Consequently, an increase in inequality lowers average education and, therefore, growth. We find that this fertility-differential effect accounts for most of the empirical relationship between inequality and growth. (JEL J13, O40)

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