The micro foundations of the Romer model

Résumé du document

The technological progress is stated as the engine of economic growth in the neoclassical growth model, but some models like Solow model, always set the technological progress as an exogenous variable with a constant rate g. Romer model indigences the technological progress, and also shows the relationship between population growth and economic growth, with the effect of labor force allocation taken into account. This assay is trying to analyze the micro foundations of the Romer model 1990, assess its conclusions, and discuss the allocation of labor in the model.

In 1980s, after the better understanding of modeling imperfect competition in a general equilibrium setting, economists was trying to develop growth models with micro foundations to explain the technology progress as an endogenized variable. Romer made an important contribution for explaining how to construct an economy of profit-maximizing agents that endogenizes technological progress, in 1990. The model consists of three sectors: the final goods sector, the intermediate goods sector and the R&D sector.

Extraits

[...] Assumptions and functions The final goods sector is assumed as including a large number of firms that combine labour and capital to produce a homogeneous output good. They purchase the capital goods / intermediate goods from the intermediate sector, and employ labour force to produce. Therefore it has the following features: - Perfect competition - Large number of capital / intermediate goods - Constant return to scale (CRTS) The production function is exhibit as: [...]

[...] I. (2002) Introduction to Economic Growth, 2nd ed, Norton. Romer, D. [...]

[...] The capital goods are produced by intermediate sector, and the number of them here is treated as given. With constant return to scale, then the output function can be exhibit in a Cobb-Douglas form The maximisation If we assume the price of the final output, is normalise to unity, then we can derive the following profit maximising function: ( 1.2 ) pj: rental price for capital good j w : wage paid for labour Revenue Labour cost Cost of capital / intermediate goods Basically, this expression tells us to maximise the revenue minus the cost of labour and take out the cost of capital, we should be able to maximise the profit of the final goods sector. [...]

[...] These two functions tell us that: the number of new ideas at any given point in time ( is equals the rate of discovery multiplies the number of researcher under the externality effect. In which the rate of discovery ( ) is varied, it could be an increasing, decreasing or constant function of it then could be expressed as the product of a constant fraction of and the A under the effect of productivity of researcher. Therefore, the new designs function ( 3.1 ) can also be rewrite as: ( 3.3 ) 3.2 Profit The profit in R&D sector can be categorized as three parts: - Price of the patent - Profits of intermediate goods form - Capital gain / loss from changes in the price of patent ( 3.4 ) : return from investing at interest rate r. [...]

[...] Conclusion After detailed study and deriving the microfoundation of the Romer model, and assessed its conclusions, what I am trying to solve here, is the problem of allocating labour force properly. Under the given assumptions, in final goods sector, intermediate goods sector, and R&D sector, the optimality of R&D in Romer is difficult to approach, due to distortions caused by endogen sing the technology process. In the real world, some of the distortion effect is very obvious, and some are not so serious, according to the researches did by Zvi Griliches and Edwin Mansfield, the society exhibits too little research in the modern patent system. [...]