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Growth and the cycle: Creative destruction versus entrenchment

  • Erik Canton
  • Harald Uhlig

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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Article provided by Springer in its journal Journal of Economics Zeitschrift für Nationalökonomie.

Volume (Year): 69 (1999)
Issue (Month): 3 (October)
Pages: 239-266

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Handle: RePEc:kap:jeczfn:v:69:y:1999:i:3:p:239-266
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=108909

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  1. 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.
  2. Ricardo J. Caballero & Mohamad L. Hammour, 1991. "The Cleansing Effect of Recessions," NBER Working Papers 3922, National Bureau of Economic Research, Inc.
  3. Bean, C., 1989. "Endogenous Growth And The Procyclical Behaviour Of Productivity," Papers 369, London School of Economics - Centre for Labour Economics.
  4. Steven J. Davis & John Haltiwanger, 1992. "Gross Job Creation, Gross Job Destruction, and Employment Reallocation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 819-863.
  5. 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.
  6. Erik Canton & Harald Uhlig, 1999. "Growth and the cycle: Creative destruction versus entrenchment," Journal of Economics, Springer, vol. 69(3), pages 239-266, October.
  7. Philippe Aghion & Peter Howitt, 1994. "Growth and Unemployment," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 477-494.
  8. repec:hrv:faseco:12490578 is not listed on IDEAS
  9. Aghion, P. & Howitt, P., 1990. "A Model Of Growth Through Creative Destruction," DELTA Working Papers 90-12, DELTA (Ecole normale supérieure).
  10. Jovanovic, Boyan & Rob, Rafael, 1990. "Long Waves and Short Waves: Growth through Intensive and Extensive Search," Econometrica, Econometric Society, vol. 58(6), pages 1391-1409, November.
  11. Grier, Kevin B. & Tullock, Gordon, 1989. "An empirical analysis of cross-national economic growth, 1951-1980," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 259-276, September.
  12. Joseph E. Stiglitz, 1993. "Endogenous Growth and Cycles," NBER Working Papers 4286, National Bureau of Economic Research, Inc.
  13. Jeremy C. Stein, 1997. "Waves of Creative Destruction: Firm-Specific Learning-by-Doing and the Dynamics of Innovation," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 265-288.
  14. Ricardo J. Caballero & Mohamad L. Hammour, 1996. "On the Timing and Efficiency of Creative Destruction," The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 805-852.
  15. Young, Alwyn, 1993. "Invention and Bounded Learning by Doing," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 443-72, June.
  16. 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.
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