Internal Increasing Returns to Scale and Economic Growth [report]

John List, Haiwen Zhou
2007 unpublished
This study develops a model of endogenous growth based on increasing returns due to firms' technology choices. Particular attention is paid to the implications of these choices, combined with the substitution of capital for labor, on economic growth in a general equilibrium model in which the R&D sector produces machines to be used for the sector producing final goods. We show that incorporating oligopolistic competition in the sector producing finals goods into a general equilibrium model with
more » ... endogenous technology choice is tractable, and we explore the equilibrium path analytically. The model illustrates a novel manner in which sustained per capita growth of consumption can be achieved --through continuous adoption of new technologies featuring the substitution between capital and labor. Further insights of the model are that during the growth process, the size of firms producing final goods increases over time, the real interest rate is constant, and the real wage rate increases over time.
doi:10.3386/t0336 fatcat:qmnyrx3y4be4zkrqheytylbnq4