On Endogenizing Long-Run strongGrowthstrong.pdf

On Endogenizing Long-Run Growth Peter J. Hammond Department of Economics, Stanford University, CA 94305-6072, U.S.A. Andrés Rodríguez-Clare Escuela de Economía, Universidad de Costa Rica, San José, COSTA RICA* May 17th, 1993; minor revisions August 9th, 1993. ABSTRACT: This assessment of recent theoretical work on endogenous growth identifies three different engines of long-run growth: (i) the asymptotic average product of capital is positive; (ii) labor productivity increases as an external effect of capital accumulation; (iii) there are feedback effects on the cost of accumulating knowledge or innovating. A general model encompassing all three is considered, and then used to review different proposed determinants of long-run growth rates. The contribution of endogenous growth theory has been to create a framework in which to explain why economic institutions and policies can have long-run effects on growth rates. Journal of Economic Literature classification number: O40 *We would like to thank Stanford Economics Ph.D. students Joshua Gans, Thomas Hellman, Giovanni Maggi, editors Torben Andersen and Kalle Moene, as well as Joaquim Silvestre, Philippe Aghion and Frank Hahn for their helpful comments on a previous rough draft of this paper. Rodríguez-Clare is also grateful to the Alfred P. Sloan Foundation for financial support in the form of a Dissertation Fellowship in the Stanford Economics Department that allowed him to concentrate on his research during the academic year 1992–3. Of course, we accept responsibility for all remaining errors. I . Introduction Progress in economic science often takes the form of explaining what was previously inexplicabl