Norman H. Sedgley III, Ph.D., Economics, Loyola University in Maryland, 4501 North charles Street, Baltimore, MD 21210 and Bruce T. Elmslie, Ph.D., Economics, University of New Hampshire, McConnell Hall, Durham, NH 03824.
Most growth theorists agree that understanding the economics of innovation and technological change is central to understanding why some countries are richer and/or grow faster than other countries. The driving force behind recent developments in endogenous innovation models of growth is a desire to eliminate scale effects. Eliminating scale effects without the addition of restrictive razor’s edge conditions implies that policy impacts the level of income on the balanced growth path but not the growth rate itself. This paper makes population growth endogenous by modeling fertility along the lines of Barro and Becker (1989) and models an array of government policies to demonstrate how some policies can impact levels and growth rates in a scale free endogenous growth model without the addition of restrictive razor’s edge conditions. In our model government policies are categorized according to whether they have level effects only, level and growth effects, or no impact on levels and/or growth. Our model also predicts that a research subsidy promotes long run growth. This result is in contrast to Jones (2003) who finds that a subsidy to research lowers long run growth in a new growth model with endogenous fertility.