Endogenous Growth when Firms and Consumers Behave Rationally in a Neoclassical Framework

This paper presents a simple Neoclassical Growth Model in which technological change is endogenous and saving behaviour affects long-term equilibrium growth, despite its simple structure and reliance on all standard Neoclassical assumptions. The only relevant difference between this model and the standard models is that firms pursue an inter-temporal optimisation, which assures that their current decisions affect their future productivity. As a consequence, to invest in technology becomes a rational decision of firms. This simple improvement endows the Neoclassical Model to overcome two of its major shortcomings as pointed out in the literature.