Merit and rent in a growing economy

- Interprets long run data on K∕Y as changes in the steady state of an endogenous growth model.
- Extends Romer's model of technological change by adding a generational risky human capital choice.
- Interprets reduction in growth as outcome of choices favouring safe capital over risky effort.

In the framework of Romer's (1990) growth model, we endogenize human capital accumulation as the risky outcome of an effort choice. Policies favouring the accumulation of physical capital may reduce the incentives to effort, leading the economy on a balanced path with a high capital intensity and a low growth rate.