On Returns to Scale Assumption in Endogenous Growth

Abstract

This study points out to a contradiction between increasing returns to scale assumption and steady-state or long run equilibrium or balanced growth analysis in models of endogenous growth. The paper reminds the necessity of the constant returns to scale assumption in models of economic growth, with special reference to models of endogenous growth, which are based on steady-state or long-run equilibrium or balanced growth. While analyzing balanced growth, some models of endogenous growth are based on increasing returns to scale but some others are based on constant returns to scale. The arguments in the present paper are simply explained by the some of the original texts on the debate. This study points out that assumption of constant returns to scale is compatible with the steady-state or long-run equilibrium or balanced growth, rather than increasing returns to scale. The paper emphasizes an important and neglected problem in endogenous growth.

Keywords: Returns to Scale, Endogenous Growth, Steady-State, Balanced Growth, Long-Run Equilibrium