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Endogenous Growth and Cycles

  • Joseph E. Stiglitz

Schumpeter argued that economic downturns had positive effects, in the incentives that it provided for firms to increase their efficiency. Part 1. provides a simple model confirming Schwnpeter's insight At thesame time, the model shows that there are real costs to economic fluctuations which extend well beyond the temporary losses in output and the economic waste resulting from unused resources: the future productivity of the economy is adversely affected, e.g, because of reduced expenditures on R&D. These long run losses are likely to be far more significant than any temporary gains from any induced cost cutting. While traditional Schumpeterian analyses have focused on the relationships between market structure and innovation, they have paid less attention to the relationship between innovation and capital market imperfections (resulting, in many cases, from problems of costly and imperfect information which are particularly important in the context of innovation). It is these capital market imperfections which give result in the deleterious effect of economic downturns on technological progress. Part II. of the paper shows that the nexus between fluctuations and innovation goes in both directions: fluctuations in economic activity not only cause fluctuations in innovation, fluctuations in innovation may give rise to fluctuations in economic activity. The positive feedback relationship between innovation and economic activity may, under a variety of conditions, give rise to multiple equilibria. There is no presumption that the free market, left to itself, will choose the best among them. Moreover, it is shown that under certain circumstances, the only market equilibrium entails economic fluctuations. It is the structure of the economy, not exogenous disturbances (as in real business cycle theory) which give rise to cyclical behavior.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4286.

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Date of creation: Mar 1993
Date of revision:
Publication status: published as Shionoya, Yuichi and Mark Perlman (eds.) Innovation in technology, industries, and institutions: Studies in Schumpeterian perspectives. Ann Arbor: University of Michigan Press, 1994.
Handle: RePEc:nbr:nberwo:4286
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  1. Bruce C. Greenwald & Joseph E. Stiglitz, 1989. "Financial Market Imperfections and Productivity Growth," NBER Working Papers 2945, National Bureau of Economic Research, Inc.
  2. Bernanke, Ben & Gertler, Mark, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 87-114, February.
  3. Gans, Joshua S., 1989. "Knowledge of growth and the growth of knowledge," Information Economics and Policy, Elsevier, vol. 4(3), pages 201-224.
  4. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
  5. Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435 National Bureau of Economic Research, Inc.
  6. Sah, R.K. & Stiglitz, J.E., 1988. "Sources Of Technological Divergence Between Development And Less Development Economies," Papers 22, Princeton, Woodrow Wilson School - Discussion Paper.
  7. Stiglitz, Joseph E, 1974. "Incentives and Risk Sharing in Sharecropping," Review of Economic Studies, Wiley Blackwell, vol. 41(2), pages 219-55, April.
  8. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  9. Bruce C. Greenwald & Joseph E. Stiglitz, 1988. "Examining Alternative Macroeconomic Theories," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 207-270.
  10. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  11. Aghion, Philippe & Howitt, Peter, 1991. "Unemployment : A symptom of stagnation or a side-effect of growth?," European Economic Review, Elsevier, vol. 35(2-3), pages 535-541, April.
  12. Jaffee, Dwight & Stiglitz, Joseph, 1990. "Credit rationing," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 16, pages 837-888 Elsevier.
  13. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
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