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-to-one 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 approp-riate 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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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number
42.
Find related papers by JEL classification: E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
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Robert E. Hall, 1999.
"Reorganization,"
NBER Working Papers
7181, National Bureau of Economic Research, Inc.
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