The Extreme Inefficiency of Expanding Variety in Endogenous Growth Theory

Modern endogenous growth models typically reconcile rising populations with constant growth rates by positing that equilibrium research effort spreads over an endogenously expanding range of goods. However, a planner could fix variety and the research share, causing the growth rate itself to rise exponentially. Further, under standard assumptions, permanently shrinking variety to early modern levels would briefly lower output but quadruple the growth rate and then cause it to rise ever higher, creating welfare gains equivalent to a >100-fold level effect. This challenges the plausibility of endogenous growth theory in its current form.