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How to Sow and Reap as You Go: a Simple Model of Cyclical Endogenous Growth

  • Zon,Adriaan,van
  • Fortune,Emmanuelle
  • Kronenberg,Tobias

    (MERIT)

In this paper, we present a simple endogenous growth model that allows for the occurrence of innovations that can develop into General Purpose Technologies (GPTs), which are the result of basic R&D. The model incorporates the main features of the Romer (1990) model and the Aghion and Howitt (1992) model by using multi-level Ethier functions on the one hand, and Poisson processes to describe the arrival of innovations produced by performing basic R&D and applied R&D. Through basic R&D the core of a potentially new GPT enters the economic system. This core offers the possibility for further expansion of the potential GPT through applied R&D by adding peripherals to this core. The characteristics of the new potential GPT that is represented by the core are randomly distributed. These characteristics include intrinsic profitability, scope for expansion, as well as R&D opportunities and efficiency of the corresponding applied R&D process. By using some illustrative simulations with the model, we show that the arrival of a successful GPT does indeed bring about a reallocation of R&D activities towards applied R&D, thus postponing the moment of arrival of the next GPT. Meanwhile, applied R&D raises the productivity of the GPT as a whole. But the profitability of finding the next/marginal peripheral falls in the process. This fall in marginal profits diminishes the incentives to engage in further applied R&D and increases the incentives to move into basic R&D activities again. Thus, we obtain a cyclical pattern in output growth that is not only partly driven by the arrival of the new potential GPTs but also by the continuing development of existing GPTs in the absence of the arrival of new ones. In periods that do not give rise to the arrival of new successful GPTs we find instances of alternating expansions of existing GPTs that have the character of a GPT-race.

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Paper provided by Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT) in its series Research Memorandum with number 029.

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Date of creation: 2003
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Handle: RePEc:unm:umamer:2003029
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  1. Timothy F. Bresnahan & Manuel Trajtenberg, 1992. "General Purpose Technologies "Engines of Growth?"," NBER Working Papers 4148, National Bureau of Economic Research, Inc.
  2. Aghion, P. & Howitt, P., 1990. "A Model Of Growth Through Creative Destruction," DELTA Working Papers 90-12, DELTA (Ecole normale supérieure).
  3. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
  4. 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.
  5. Paul Romer, 1989. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
  6. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  7. Olsson, Ola, 2001. "Why Does Technology Advance in Cycles?," Working Papers in Economics 38, University of Gothenburg, Department of Economics.
  8. David, Paul A, 1990. "The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox," American Economic Review, American Economic Association, vol. 80(2), pages 355-61, May.
  9. Jovanovic, Boyan & Rob, Rafael, 1987. "Long Waves and Short Waves: Growth Through Intensive and Extensive Search," Working Papers 87-35, C.V. Starr Center for Applied Economics, New York University.
  10. Philippe AGHION & Peter HOWITT, 1998. "On the Macroeconomic Effects of Major Technological Change," Annales d'Economie et de Statistique, ENSAE, issue 49-50, pages 53-75.
  11. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June.
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