Endogenous Growth Theory - Models in Endogenous Growth

Models in Endogenous Growth

In the mid-1980s, a group of growth theorists became increasingly dissatisfied with common accounts of exogenous factors determining long-run growth. They favored a model that replaced the exogenous growth variable (unexplained technical progress) with a model in which the key determinants of growth were explicit in the model. The initial research was based on the work of Kenneth Arrow (1962), Hirofumi Uzawa (1965), and Miguel Sidrauski (1967). Paul Romer (1986), Lucas (1988), and Rebelo (1991) omitted technological change. Instead, growth in these models was due to indefinite investment in human capital which had spillover effect on economy and reduces the diminishing return to capital accumulation.

The AK model, which is the simplest endogenous model, gives a constant-saving-rate of endogenous growth. It assumes a constant, exogenous saving rate and fixed level of the technology. It shows elimination of diminishing returns leading to endogenous growth. However, the endogenous growth theory is further supported with models in which agents optimally determined the consumption and saving, optimizing the resources allocation to research and development leading to technological progress. Romer (1987, 1990) and significant contributions by Aghion and Howitt (1992) and Grossman and Helpman (1991), incorporated imperfect markets and R&D to the growth model.