The theory also focuses on positive externalities and spillover effects of a knowledge-based economy which will lead to economic development.
The work of Kenneth Arrow (1962), Hirofumi Uzawa (1965), and Miguel Sidrauski (1967) formed the basis for this research.
[2] Paul Romer (1986), Robert Lucas (1988), Sergio Rebelo (1991)[3] and Ortigueira and Santos (1997) omitted technological change; instead, growth in these models is due to indefinite investment in human capital which had a spillover effect on the economy and reduces the diminishing return to capital accumulation.
Romer (1986, 1990) and significant contributions by Aghion and Howitt (1992) and Grossman and Helpman (1991), incorporated imperfect markets and R&D to the growth model.
Endogenous growth theory tries to overcome this shortcoming by building macroeconomic models out of microeconomic foundations.
The engine for growth can be as simple as a constant return to scale production function (the AK model) or more complicated set ups with spillover effects (spillovers are positive externalities, benefits that are attributed to costs from other firms), increasing numbers of goods, increasing qualities, etc.
However, in many endogenous growth models the assumption of perfect competition is relaxed, and some degree of monopoly power is thought to exist.
The sort of economic progress that has been enjoyed by the richest nations since the Industrial Revolution would not have been possible if people had not undergone wrenching changes.
[5] One of the main failings of endogenous growth theories is the collective failure to explain conditional convergence reported in empirical literature.