Economic growth and economic development 585

CHAPTER 13

Expanding Variety Models
As emphasized in the previous chapter, the key to endogenous technological
progress is that the R&D is a purposeful activity, undertaken for profits, and the
knowledge (machines, blueprints, or new technologies) that it generates increases the
productivity of existing factors. The first endogenous technological change models
were formulated by Romer (1987 and 1990). Different versions have been analyzed
by Segerstrom, Anant and Dinopoulos (1990), Grossman and Helpman (1991a,b),
Aghion and Howitt (1992). Some of those will be discussed in the next chapter.
The simplest models of endogenous technological change are those in which the
variety of inputs used by firms increases (expands) over time as a result of R&D
undertaken by research firms. In this chapter, we focus on these expanding input
(machine) variety models. In this model, research (R&D) leads to the creation of
new varieties of machines (inputs), and a greater variety of machines leads to greater
“division of labor,” increasing the productivity of final good firms. This can therefore
be viewed as a form of process innovation. An alternative, formulated and studied
by Grossman and Helpman (1991a,b), focuses on product innovation. In this model,
research leads to the invention of new goods, and because individuals have love-forvariety, they derive greater utility when they consume a greater variety of products.
Consequently “real” income increases as a result of these product innovations. Since
this variant of the model is slightly more difficult, we postpone its discussion to the
end of this chapter.
In all of these models, and also in the models of quality competition we will see
below, we will use the Dixit-Stiglitz constant elasticity structure introduced in the
previous chapter.

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