Endogenous Growth Model with Public Financed R&D
In Chap. 4, we discussed long run growth based on neoclassical growth models. As shown in Chap. 4, main characteristics of a typical neoclassical production function are as follows. First, the output depends on capital, labor, and productivity. Second, the production function exhibits positive and diminishing marginal products with respect to each input. Third, the marginal product of capital (or labor) approaches 0 as capital (or labor) goes to infinity. We showed in Chap. 4 that the long-run growth rate converges to 0 if the returns to capital are 0 asymptotically. So if we employ a production function in which productivity is constant over time, then growth peters out eventually. However, this result is just not realistic. Economic growth rates of many countries do not seem to converge to 0. To avoid zero growth in the steady state, we must consider alternative production functions in which diminishing returns to capital do not converge to 0 in the long run.
KeywordsCapital Stock Capital Accumulation Physical Capital Research Sector Knowledge Stock
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