see Greiner et al (2004).3 Let the Cobb-Douglas aggregate production function with constant
returns and Hicks neutral technical progress at time t be:
Yt = AtKtαLt(1-α) (1)
Where, Y, K, L denote, respectively, output; capital stock and labour and A is the stock of
knowledge. This equation can be expressed in per worker terms and with the assumption
that At= A0 egt i.e., initial stock of knowledge A0 grows at a constant rate of g in time as
follows.
yt = A0egtktα (2)
The rate of growth of TFP thus equals g in equation (2). If a vector of variable Zi has
permanent growth effects, e.g., globalization and institutional reforms etc., then g can be
assumed to be a function of the variables in Zi.Therefore, (2) can be expressed as:4
yt = A0 e (gg 0+ g 1Z1+g 2 Z 2 +-) Tktα (3)
3 Many empirical works that claim to be based on some endogenous growth model have used by and large
arbitrary specifications. Easterly et. al. (2004) express serious concerns about such specifications as follows:
“This literature has the usual limitations of choosing a specification without clear guidance from theory, which
often means there are more plausible specifications than there are data points in the sample”. Rogers (2003)
also takes a similar view but justifies ad hoc specifications because though this is less than ideal, the
complexity of economic growth and the lack of an encompassing model make it a necessity. Although it is not
easy to say what will be the nature of biases in the estimated parameters with ad hoc specifications, our
subsequent empirical results indicate that the permanent growth effects of the explanatory variables are likely
to be overestimated.
4 For example, Winters (2004), Edwards (1998) and Dollar and Kraay (2004) take the view that a more
convincing and robust evidence between openness or globalization and growth should be derived from their
effects on productivity.