Schumpeterian growth with variable demand elasticity

Abstract

Variable Demand Elasticity preferences are introduced into a canonical two-sector R&D model. The departure from the traditional CES specification yields novel growth dynamics: for a sufficiently high population growth rate, a semi-endogenous balanced growth path (“BGP”) of drastic innovation is characterized, along which economic growth is determined by the population growth rate. However, for a sufficiently low population growth rate, the model economy converges to the limit values of demand elasticity and a fully endogenous growth regime of non-drastic innovation. A few stylized facts undermine the empirical relevance of the semi-endogenous BGP with drastic innovation to developed economies.