The second wave of endogenous growth theory consists of modern innovation-based models. These theories explicitly analyze how profit-seeking firms and individuals create the technological progress that drives growth. There are two main branches of these theories:

1. Product-Variety Models: In these models, innovation leads to the creation of new types of products, increasing the variety of intermediate goods available for production.
2. Schumpeterian Models: In these models, innovation leads to the creation of better quality products that replace older, inferior ones.