Duke Economics Working Paper #99-11
We generalize the class of endogenous growth models in which the scale of the economy has level rather than growth effects, and study the implications of different demographic and research policies when both fertility choice and research effort are endogenous. The model incorporates two dimensions of technological progress: vertical (quality of goods) and horizontal (variety of goods). Both dimensions contribute to productivity growth but are driven by different processes and hence respond differently to policies. Specifically, while unbounded vertical progress is feasible, the scale of the economy limits the variety of goods. Incorporating a linearity in reproduction generates steady-state population growth and variety expansion. We thus have two engines of growth generating dynamics that we compare with observed changes in demographics, market structure, and patterns of growth. Numerical solutions yield the important insight that while endogenous, fertility responds very little to industrial policies, leaving vertical innovation to be the dominating force in the economy. Demographic shocks, in contrast, have substantial effects on growth.
Key Words: Endogenous Growth, Market Structure, Fertility Choice, Population Growth
JEL: E10, L16, O31, L40
Published in Journal of Economic Growth, Vol. 8, No. 1, March 2003, pp. 115-148.
*This paper was previously titled "Industrial Revolutions and Demographic Transitions."