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We propose a model of endogenous economic growth with “weak” scale effects
and diminishing returns to innovation at the micro level. In our model, entrants
introduce new technologies through research and incumbents incrementally improve
them through development. Over time, further improvement becomes harder such
that firms ultimately run out of ideas and exit, paving the way for entrants that
discover new technologies with further room for improvement. This turnover
gives rise to a continuous stream of (temporary) opportunities for technological
improvements that sustain economic growth. In a stationary equilibrium, the longrun
growth rate is constant and endogenous to market incentives.
