Increasing Returns and Long-Run Growth

Abstract

This paper presents a fully specified model of long-run growth in which knowledge is assumed to be an input in production that has increasing marginal productivity.It is essentially a competitive equilibrium model with endogenous technological change.In contrast to models based on diminishing returns, growth rates can be increasing over time, the effects of small disturbances can be amplified by the actions of private agents, and large countries may always grow faster than small countries.Long-run evidence is offered in support of the empirical relevance of these possibilities. This paper is based on work from my dissertation (Romer 1983). An earlier version of this paper circulated under the title "Externalities and Increasing Returns in Dynamic Competitive Analysis.' At various stages I have benefited from comments by James J.