A growth model with qualities, varieties, and human capital: stability and transitional dynamics

This article analyses the stability properties of the steady-state and the transitional dynamics of an endogenous growth model with human capital, increasing-varieties R&D, and quality-ladders R&D [Strulik, H. 2005. “The Role of Human Capital and Population Growth in R&D-Based Models of Economic Growth.” Review of International Economics 13 (1): 129–145.]. We show that when spillovers within R&D sectors are higher than spillovers across the two R&D sectors, the equilibrium is unstable. However, when spillovers between sectors are higher than within, the equilibrium is a saddle-path. This result emphasizes the need for empirical research that compares quantitatively the importance of these two types of spillovers and highlights the importance of studying intersectoral effects between the two R&D sectors. We describe plausible paths of economic development after changes in crucial parameters and uncover some transitional effects that were impossible to detect in the steady-state analysis. We also show that this model’s transition dynamics can mimic the main features of the process of productivity slowdown that began in the 1970s.