Romer: Endogenous Technological Change

PM Romer, “Endogenous Technological Change,” Journal of Political Economy 98, no. S5 (1990): 71.

"Growth in this model is driven by technological change that arises from intentional investment decisions made by profit-maximizing agents. The distinguishing feature of the technology as an input is that it is neither a conventional good nor a public good; it is a non-rival, partially excludable good. Because of the nonconvexity introduced by a nonrival good, price-taking competition cannot be supported. Instead, the equilibrium is one with monopolistic competition. The main conclusions are that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth" (71).

The author puts forth three premises of the article: The first is that changes in technology is the key stone of economic growth. In this sense, this Romer model closely mirrors Solow's model. "Technological change provides the incentive for continued capital accumulation, and together, capital accumulation and technological change account for much of the increase in output per hour worked" (72). The second premise is that technology improvements are brought about by people who are directly responding to market motivations. "Thus the model is one of endogenous rather than exogenous technological change. This does not mean that everyone who contributes to technological change is motivated by market incentives...The premise here is that market incentives nonetheless play an essential role in the process whereby new knowledge is translated into goods with practical value" (72). According to Romer, the most fundamental supposition is the last: this involves the creation of new "instructions" for dealing with raw materials. Once the cost of these "instructions" has been borne, the benefits continue to accumulate.

There is then an extended discussion of the distinction between rivalrous, nonrivalrous, excludable and nonexcludable goods and how they are and may be treated in economic growth models.

The model is then worked out in some detail.

"The model presented here is essentially the one-sector neoclassical model with technological change, augmented to give an endogenous explanation of the source of the technological change" (99).

"The most interesting positive implication of the model is that an economy with a larger total stock of human capital will experience faster growth" (99).