Growth with technical change and human capital: transition dynamics versus steady state predictions

Abstract

This paper studies the steady-state and transitional dynamics predictions of an R&D-based growth model and evaluates their performance in explaining income disparities across countries. We fnd that even though steady-state conditions do slightly better at predicting schooling enrollment and investment rates, transitional dynamics predictions better fit the cross-country output per worker data. These results suggest that the traditional view of a world in which nations move along their distinct balanced-growth paths is as likely as the one in which countries move along adjustment paths toward a common (very long-run) steady state. In addition, the model provides a reduced form empirical specification that incorporates capital input and R&D-effort measures. Therefore, we can compare the performance of the standard neoclassical growth model to that of an R&D-based growth model with human capital and imperfect competition, like ours. This stands in contrast to the prevalent view that reduced form regressions cannot discriminate between neoclassical and R&D-based growth frameworks.