This paper consists of an analytical review of the most relevant endogenous growth models. The objective of this literature review is to discuss analytically and understand, in an integrated form, the main mechanisms, identified in the existing literature, that generate endogenous growth. Endogenous or new growth theory has, so far, produced three main types of mechanisms through which endogenous sustained positive economic growth is made possible. One strategy brings a theory of innovations or R&D into the growth model. In this type of model, endogenously determined technological progress is the engine of economic growth. The second mechanism delivers sustained positive growth through the introduction of an endogenously determined accumulation of human capital. In this kind of model, the source of long-run per-capita growth is human capital accumulation. And a third way to obtain endogenous growth is simply to abandon one of the standard assumptions of the neoclassical model, more precisely the assumption of diminishing returns to capital.; Universidade do MInho - (UM). Fundação para a Ciência e Tecnologia (FCT).

This paper consists of an analytical review of the most relevant endogenous growth models. The objective of this literature review is to discuss analytically and understand, in an integrated form, the main mechanisms, identified in the existing literature, that generate endogenous growth. Endogenous or new growth theory has, so far, produced three main types of mechanisms through which endogenous sustained positive economic growth is made possible. One strategy brings a theory of innovations or R&D into the growth model. In this type of model, endogenously determined technological progress is the engine of economic growth. The second mechanism delivers sustained positive growth through the introduction of an endogenously determined accumulation of human capital. In this kind of model, the source of long-run per-capita growth is human capital accumulation. And a third way to obtain endogenous growth is simply to abandon one of the standard assumptions of the neoclassical model, more precisely the assumption of diminishing returns to capital.; I wish to thank Sayantan Ghosal for his encouragement, involvement and intellectual stimulation and Marcus Miller for his insightful comments. I am also grateful to Paul Romer. Financial support from Universidade do Minho- Portugal and Fundação Ciência e Tecnologia-Portugal are gratefully acknowledged. The usual disclaimer applies.

Because adaptation depends upon the fixation of novel beneficial mutations, the fitness effects of beneficial mutations that are substituted by selection are key to our understanding of the process of adaptation. In this study, we experimentally investigated the fitness effects of beneficial mutations that are substituted when populations of the pathogenic bacterium Pseudomonas aeruginosa adapt to the antibiotic rifampicin. Specifically, we isolated the first beneficial mutation to be fixed by selection when 96 populations of three different genotypes of P. aeruginosa that vary considerably in fitness in the presence of rifampicin were challenged with adapting to a high dose of this antibiotic. The simple genetics of rifampicin resistance allowed us to determine the genetic basis of adaptation in the majority of our populations. We show that the average fitness effects of fixed beneficial mutations show a simple and clear pattern of diminishing returns, such that selection tends to fix mutations with progressively smaller effects as populations approach a peak on the adaptive landscape. The fitness effects of individual mutations, on the other hand, are highly idiosyncratic across genetic backgrounds, revealing pervasive epistasis. In spite of this complexity of genetic interactions in this system...

This research examined the predictive validity of the SAT (formerly, the Scholastic Aptitude Test) for high and low ability groups. SAT scores and college GPAs were obtained from the 1997 National Longitudinal Survey of Youth. Subjects were classified as high or low ability by g factor scores from the Armed Services Vocational Aptitude Battery. SAT correlations with GPA were higher for high than low ability subjects. SAT g loadings (i.e., SAT correlations with g) were equivalent for both groups. This is the first study to show that the predictive validity of the SAT varies for ability groups that differ in g. The results contradict a presumption, based on Spearman’s Law of Diminishing Returns, that a test’s predictive validity should be lower for high ability subjects. Further research is needed to identify factors that contribute to the predictive validity of the SAT for groups that differ in g.

Epistasis substantially impacts evolution, in particular the rate of adaptation. We generated combinations of beneficial mutations that arose in a lineage during rapid adaptation of a bacterium whose growth depended upon a newly-introduced metabolic pathway. The proportional selective benefit for three of the four loci consistently decreased when introduced upon more fit backgrounds. These three alleles all reduced morphological defects caused by expression of the foreign pathway. A simple theoretical model segregating the apparent contribution of individual alleles to benefits and costs effectively predicted the interactions between them. These results provide the first evidence that patterns of epistasis may differ for within- and between-gene interactions during adaptation, and that diminishing returns epistasis contributes to the consistent observation of decelerating fitness gains during adaptation.

According to T.W. Schultz, the returns to human capital are highest in economic environments experiencing unexpected price, productivity, and technology shocks that create "disequilibria." In such environments, the ability of firms and individuals to adapt their resource allocations to shocks becomes most valuable. In the case of negative shocks, government policies that mitigate the impact of the shock will also limit the returns to the skills of managing risk or adapting resources to changing market forces. In the case of positive shocks, government policies may restrict access to credit, labor, or financial markets in ways that limit reallocation of resources toward newly emerging profitable sectors. This paper tests the hypothesis that the returns to skills are highest in countries that allow individuals to respond to shocks. Using estimated returns to schooling and work experience from 122 household surveys in 86 developing countries, this paper demonstrates a strong positive correlation between the returns to human capital and economic freedom...

This paper analyzes data from a randomized experiment on mean returns to capital in Sri Lankan micro-enterprises. The findings show greater returns among men than among women; indeed, returns were not different from zero for women. The authors explore different explanations for the lower returns among female owners, and find no evidence that the gender gap is explained by differences in ability, risk aversion, or entrepreneurial attitudes. Differential access to unpaid family labor and social constraints limiting sales to local areas are not important. However, there is evidence that women invested grants differently from men. A smaller share of the smaller grants remained in the female-owned enterprises, and men were more likely to spend the grant on working capital and women on equipment. The gender gap is largest when male-dominated sectors are compared with female-dominated sectors, although female returns are lower than male returns even for females working in the same industries as men. The authors examine the heterogeneity of returns to determine whether any group of businesses owned by women benefit from easing capital constraints. The results suggest there is a large group of high-return male owners and a smaller group of poor...

The number of national export promotion agencies (EPAs) has tripled over the past two decades. While more countries have made them part of their national export strategy, studies have criticized their efficiency in developing countries (Hogan, Keesing, and Singer 1991). Partly in reaction to these critiques, EPAs have been retooled (see International Trade Centre, ITC, 1998 or 2000, for example). This paper studies the impact of existing EPAs and their strategies based on a new data set covering 104 industrial and developing countries. Results suggest that on average they have a strong and statistically significant impact on exports. For each $1 of export promotion, the paper estimates a $40 increase in exports for the median EPA. However, there is heterogeneity across regions, levels of development, and types of instruments. Furthermore, there are strong diminishing returns, suggesting that as far as EPAs are concerned, small is beautiful.

Using a new global data base on patents and innovation inputs, the authors examine the process of knowledge creation measured by the dynamic relationship between research and development and U.S. patents granted. They confirm at the country level the recurrent micro-level finding of a strong relationship between the two and estimate the OECD elasticity to be effectively equal to one. This conflicts with the frequent micro-level finding of strongly diminishing returns in knowledge generation and suggests the importance of knowledge spillover effects measurable only at the aggregate level. Developing countries, however, do show diminishing returns. The authors then explain the differences in spillovers between the OECD and developing countries by testing for the impact of measures of the functioning of the national innovation system-the set of institutions and agents that create and disseminate knowledge. Across the entire sample education, security of intellectual property rights, and in some specifications, the quality of research institutions and their interaction with the private sector, affect the transformation of research and development into patents.

Does "empowerment" come hand-in-hand with higher economic welfare? In theory, higher income is likely to raise both power and welfare, but heterogeneity in other characteristics and household formation can either strengthen or weaken the relationship. Survey data on Russian adults indicate that higher individual and household incomes raise both self-rated power and welfare. The individual income effect is primarily direct, rather than through higher household income. There are diminishing returns to income, though income inequality emerges as only a minor factor reducing either aggregate power or welfare. At given income, the identified covariates have strikingly similar effects on power and welfare. There are some notable differences between men and women in perceived power.

Capital flows to developing countries are small and take mostly the form of loans rather than direct foreign investment. We build a simple model of North-South capital flows that highlights the interplay between diminishing returns, production risk and sovereign risk. This model generates a set of country portfolios and a world distribution of capital stocks that resemble those in the data.

The authors estimate social rates of return to electricity-generating capacity and paved roads, relative to the return on general capital, by examining the effect on aggregate output and comparing that effect with the costs of construction. They find that both types of infrastructure capital are highly complementary with other physical capital and human capital, but have rapidly diminishing returns if increased in isolation. The complementarities on the one hand, and diminishing returns on the other, point to the existence of an optimal mix of capital inputs, making it very easy for a country to have too much - or too little - infrastructure. For policy purposes, the authors compare the rate of return for investing in infrastructure with the estimated rate of return to capital. The strong complementarity between physical and human capital, and the lower prices of investment goods in industrial economies, means that the rate of return to capital as a whole is just as high in rich countries as in the poorest countries but is highest in the middle-income (per capita) countries. In most countries the rates of return to both electricity-generating capacity and paved roads are on a par with...

This paper examines the possibility of environmental "development traps," or "brown poverty traps," caused by interactions between the impacts of climate change and increasing returns in the development of "clean-technology" sectors. A simple specification is used in which the economy can produce a single homogeneous consumption good with two different technologies. In the "old" sector, technology has global diminishing returns to scale and depends on the use of fossil energy that gives rise to long-lived, damaging climate change. In the "new" sector, the technology has convex-concave production and is not dependent on the polluting energy input. If the new sector does not grow fast enough to move through the phase of increasing returns, then the economy may linger at a low level of income indefinitely or it may achieve greater progress but then get driven back down to a lower level of income by environmental degradation. Stimulating growth in the new sector thus may be a key element for avoiding an environmental poverty trap and achieving higher...

Standard economic theory suggests that capital should flow from rich countries to poor countries. However, capital has predominantly flowed to rich countries. The three essays in this dissertation attempt to explain this phenomenon. The first two essays suggest theoretical explanations for why capital has not flowed to the poor countries. The third essay empirically tests the theoretical explanations. The first essay examines the effects of increasing returns to scale on international lending and borrowing with moral hazard. Introducing increasing returns in a two-country general equilibrium model yields possible multiple equilibria and helps explain the possibility of capital flows from a poor to a rich country. I find that a borrowing country may need to borrow sufficient amounts internationally to reach a minimum investment threshold in order to invest domestically. The second essay examines how a poor country may invest in sectors with low productivity because of sovereign risk, and how collateral differences across sectors may exacerbate the problem. I model sovereign borrowing with a two-sector economy: one sector with increasing returns to scale (IRS) and one sector with diminishing returns to scale (DRS). Countries with incomes below a threshold will only invest in the DRS sector...

The article documents five stylized facts of economic growth: (1) the 'residual' (total factor productivity, tfp) rather than factor accumulation accounts for most of the income and growth differences across countries; (2) income diverges over the long run; (3) factor accumulation is persistent while growth is not, and the growth path of countries exhibits remarkable variation; (4) economic activity is highly concentrated, with all factors of production flowing to the richest areas; and (5) national policies are closely associated with long-run economic growth rates. These facts do not support models with diminishing returns, constant returns to scale, some fixed factor of production, or an emphasis on factor accumulation. However, empirical work does not yet decisively distinguish among the different theoretical conceptions of tfp growth. Economists should devote more effort toward modeling and quantifying tfp.

It is widely assumed that pervasive credit market failures mean that a person's current wealth is critical to whether or not that person can take up opportunities to start a new business. The authors show that inequality in wealth can be either good or bad for the level of entrepreneurship in an economy, depending on how diminishing returns to capital interact with borrowing constraints at the microeconomic level. They use nonparametric regression methods to study wealth effects on business start-ups among migrants returning to their home country, Tunisia. They include controls for heterogeneity, with specification tests for the nonseparable effects with wealth and for selection bias. There is no evidence of increasing returns at low wealth. The aggregate number of business start-ups is an increasing function of aggregate wealth but a decreasing function of wealth inequality. In other words, at any given mean, the higher the initial inequality of wealth, the lower the rate of new business start-ups, through the existence of diminshing returns to capital given liquidity constraints. In this sense...

The number of national export promotion agencies has tripled over the past two decades. Although more countries made them part of their export strategy, studies criticized their efficacy in developing countries. The agencies were retooled, partly in response to these critiques. This paper studies the impact of today's export promotion agencies and their strategies, based on new survey data covering 103 developing and developed countries. The results suggest that on average they have a statistically significant effect on exports. The identification strategies highlight the importance of EPA services for overcoming foreign trade barriers and solving asymmetric information problems associated with exports of heterogeneous goods. There are also strong diminishing returns, suggesting that as far as export promotion agencies are concerned, small is beautiful.

Altruism and selfishness are 30–50% heritable in man in both Western and non-Western populations. This genetically based variation in altruism and selfishness requires explanation. In non-human animals, altruism is generally directed towards relatives, and satisfies the condition known as Hamilton's rule. This nepotistic altruism evolves under natural selection only if the ratio of the benefit of receiving help to the cost of giving it exceeds a value that depends on the relatedness of the individuals involved. Standard analyses assume that the benefit provided by each individual is the same but it is plausible in some cases that as more individuals contribute, help is subject to diminishing returns. We analyse this situation using a single-locus two-allele model of selection in a diploid population with the altruistic allele dominant to the selfish allele. The analysis requires calculation of the relationship between the fitnesses of the genotypes and the frequencies of the genes. The fitnesses vary not only with the genotype of the individual but also with the distribution of phenotypes amongst the sibs of the individual and this depends on the genotypes of his parents. These calculations are not possible by direct fitness or ESS methods but are possible using population genetics. Our analysis shows that diminishing returns change the operation of natural selection and the outcome can now be a stable equilibrium between altruistic and selfish alleles rather than the elimination of one allele or the other. We thus provide a plausible genetic model of kin selection that leads to the stable coexistence in the same population of both altruistic and selfish individuals. This may explain reported genetic variation in altruism in man.

The adaptive evolution of large asexual populations is generally characterized by competition between clones carrying different beneficial mutations. This interference phenomenon slows down the adaptation speed and makes the theoretical description of the dynamics more complex with respect to the successional occurrence and fixation of beneficial mutations typical of small populations. A simplified modeling framework considering multiple beneficial mutations with equal and constant fitness advantage captures some of the essential features of the actual complex dynamics, and some key predictions from this model are verified in laboratory evolution experiments. However, in these experiments the relative advantage of a beneficial mutation is generally dependent on the genetic background. In particular, the general pattern is that, as mutations in different loci accumulate, the relative advantage of new mutations decreases, trend often referred to as "diminishing return" epistasis. In this paper, we propose a phenomenological model that generalizes the fixed-advantage framework to include in a simple way this feature. To evaluate the quantitative consequences of diminishing returns on the evolutionary dynamics, we approach the model analytically as well as with direct simulations. Finally...

In microeconomic analysis functions with diminishing returns to scale (DRS) have frequently been employed. Various properties of increasing quasiconcave aggregator functions with DRS are derived. Furthermore duality in the classical sense as well as of a new type is studied for such aggregator functions in production and consumer theory. In particular representation theorems for direct and indirect aggregator functions are obtained. These involve only small sets of generator functions. The study is carried out in the contemporary framework of abstract convexity and abstract concavity.; Martínez-Legaz's research was supported in part by the Ministerio de Ciencia y Tecnología, project BEC2002-00642, and by the Comissionat per Universitats i Recerca de la Generalitat de Catalunya, grant SGR2001-00162.