Endogenous growth with R&D and human capital: the role of returns to scale

Recent modelling of endogenous growth allows for both endogenous creation of ideas for new technology through R&D and endogenous accumulation of human capital. This paper extends the literature by addressing two counterfactual predictions and reconsidering the need for a policy trade-off where R&D and human capital formation draw on the same resources. Our two-knowledge-sector model of endogenous growth allows R&D and human capital formation to use the same inputs and returns to scale to vary across sectors. We find that growth in ideas will outstrip growth in individual skill even if population growth ceases, the level of per capita income is increasing in technology and reallocating resources to R&D unambiguously raises growth in per capita income. Copyright 2013 Oxford University Press 2012 All rights reserved, Oxford University Press.