Endogenous growth through externalities of investment: A different approach

One strand of endogenous growth theory deals with models where investment in physical capital shows positive externalities leading to increasing returns in the aggregate production function. Most of these models, however, assume that investment in physical capital influences the stock of human capital and physical capital to the same extent so that those two variables can be merged into one single-state variable Sheshinski, 1967; Romer, 1986]. This paper points to some implications if this assumption is abandoned and underlines the consequences if human and physical capital are treated as two separate variables.