Copyrights to papers in the Duke Economics Working Paper Archive remain with the authors or their assignees. Archive users may download papers and produce them for their own personal use, but downloading of papers for any other activity, including reposting to other electronic bulletin boards or archives, may not be done without the written consent of the authors.

Duke Economics Working Paper #99-11

Industry and the Family: Two Engines of Growth*


Michelle Connolly
and
Pietro F. Peretto

Abstract

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."