Examine the dynamic properties of endogenous growth models, specifically the Romer model featuring human capital accumulation. What distinguishes endogenous growth theory from the traditional Solow-Swan neoclassical framework?

💡 Solution & Explanation

Endogenous growth theory avoids the assumption of diminishing returns to reproducible capital by including human capital, knowledge creation, and spillover effects. Unlike the Solow model where long-run per capita growth is driven by exogenous technological change, endogenous models explain technological advancement as a product of internal profit-maximizing research and development decisions. This framework provides theoretical justification for public subsidies directed toward education and innovation infrastructure. Developing economies rely on such insights to design productivity-enhancing structural reforms.