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Growth and the Cycle: Creative Destruction versus Entrenchment

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  • Uhlig, H.F.H.V.S.
  • Canton, E.J.F.

    (Tilburg University, Center for Economic Research)

Abstract

Newly established firms often try to secure their market position by building up a base of loyal customers. While recessions may not destroy technological leadership, they may be harmful for such firm-customer relationships. Without such customer bases, these firms find themselves more vulnerable to attacks by competitors. We formulate this idea within an Aghion-Howitt-type model of creative destruction and discuss its implications for growth. In the context of this model, recessions might be good for growth since they weaken the incumbent firm’s position, and thereby stimulate research by outside firms. The model allows for the extreme case where the leading firm can be so entrenched that growth ceases, unless a recession shakes up its customer base. We find a one-toone relationship between the average growth rate and the cyclical variability, a U-shaped relationship between the average speed of building up good customer relationships and the average growth rate, and a positive relationship between the arrival rate of recessions and average growth. It is finally shown that an appropriate stochastic tax program can implement the social planner’s solution. In some cases, general equilibrium effects may generate interesting results, conflicting with intuition from a partial equilibrium approach: we show that, in some cases, a social planner might want to subsidize research in order to discourage it.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1997-42.

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Date of creation: 1997
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Handle: RePEc:dgr:kubcen:199742

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Keywords: economic growth; business cycles;

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References

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  1. Davis, Steven J & Haltiwanger, John C, 1992. "Gross Job Creation, Gross Job Destruction, and Employment Reallocation," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 819-63, August.
  2. Segerstrom, Paul S & Anant, T C A & Dinopoulos, Elias, 1990. "A Schumpeterian Model of the Product Life Cycle," American Economic Review, American Economic Association, vol. 80(5), pages 1077-91, December.
  3. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," UWO Department of Economics Working Papers 8904, University of Western Ontario, Department of Economics.
  4. Bean, Charles R., 1990. "Endogenous growth and the procyclical behaviour of productivity," European Economic Review, Elsevier, vol. 34(2-3), pages 355-363, May.
  5. Aghion, Philippe & Howitt, Peter, 1994. "Growth and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 477-94, July.
  6. Boyan Jovanovic & Rafael Rob, 1990. "Long Waves and Short Waves: Growth Through Intensive and Extensive Search," Levine's Working Paper Archive 2082, David K. Levine.
  7. Kormendi, Roger C. & Meguire, Philip G., 1985. "Macroeconomic determinants of growth: Cross-country evidence," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 141-163, September.
  8. Nancy L Stokey, 1986. "Learning-by-Doing and the Introduction of New Goods," Discussion Papers 699, Northwestern University, Center for Mathematical Studies in Economics and Management Science, revised May 1987.
  9. Caballero, R.J. & Hammour, M.L., 1991. "The Cleansing Effect of Recessions," Discussion Papers 1991_59, Columbia University, Department of Economics.
  10. Joseph E. Stiglitz, 1993. "Endogenous Growth and Cycles," NBER Working Papers 4286, National Bureau of Economic Research, Inc.
  11. Uhlig, H.F.H.V.S. & Canton, E.J.F., 1997. "Growth and the Cycle: Creative Destruction versus Entrenchment," Discussion Paper 1997-42, Tilburg University, Center for Economic Research.
  12. Caballero, Ricardo J & Hammour, Mohamad L, 1996. "On the Timing and Efficiency of Creative Destruction," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 805-52, August.
  13. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  14. Young, Alwyn, 1993. "Invention and Bounded Learning by Doing," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 443-72, June.
  15. Robert E. Hall, 1999. "Reorganization," NBER Working Papers 7181, National Bureau of Economic Research, Inc.
  16. Stein, Jeremy C, 1997. "Waves of Creative Destruction: Firm-Specific Learning-by-Doing and the Dynamics of Innovation," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 265-88, April.
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Cited by:
  1. Gadi Barlevy, 2004. "On the Timing of Innovation in Stochastic Schumpeterian Growth Models," NBER Working Papers 10741, National Bureau of Economic Research, Inc.
  2. Uhlig, H.F.H.V.S. & Canton, E.J.F., 1997. "Growth and the Cycle: Creative Destruction versus Entrenchment," Discussion Paper 1997-42, Tilburg University, Center for Economic Research.
  3. Fung, Ka Wai Terence & Lau, Chi Keung Marco, 2013. "Financial Development, Econmic Growth and R&D Cyclical Movement," MPRA Paper 52567, University Library of Munich, Germany.
  4. Denicolo, Vincenzo, 2001. "Growth with non-drastic innovations and the persistence of leadership," European Economic Review, Elsevier, vol. 45(8), pages 1399-1413, August.
  5. Arkadiusz Œwiadek, 2013. "Economic Cycle And Regional Innovative Activity In The Pomeranian Industrial System In 2009-11," Polish Journal of Management Studies, Czestochowa Technical University, Department of Management, vol. 7(1), pages 8-16, December.
  6. Iain Clacher,, 2010. "National accounting for intangible assets in the knowledge economy," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 18(2), pages 106-119, May.

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