Schumpeterian Growth with Variable Demand Elasticity

I study Schumpeterian growth under Variable Demand Elasticity preferences in a canonical Two-R&D-sector model with both vertical and horizontal innovation. Within this framework, I show how the departure from the traditional CES specification alters both the positive and normative characteristics of the Schumpeterian growth dynamics: (a) for a sufficiently high population growth rate relative to the innovation opportunity, there is a balanced growth path -"BGP"- of drastic innovation where the innovation size is determined by the population growth rate, that is growth is semi-endogenous. However, for a sufficiently low population growth rate, the model economy converges to the limit values of demand elasticity and to fully endogenous growth (b) Along the BGP with innovation size equal to the population growth rate, welfare is maximized with a higher ratio of product varieties per consumer and a lower per-variety output.