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Implementation Cycles : Investment-Specific Technological Change and the Length of Patents

  • Rousakis, Michael

    (University of Warwick)

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    This paper shows that implementation cycles, introduced in Shleifer (1986) , are possible in the presence of capital and the absence of borrowing constraints. In a two-sector economy, patents on cost-saving ideas which take the form of investment-specific technological change arrive exogenously at a sequential, perfectly smooth rate : in odd-numbered periods, they reach a firm producing capital of type 1 and, in the even-numbered ones, a firm producing capital of type. Firms can make profits out of these once. While the immediate appropriation (henceforth, "implementation") of patents is always a possibility, for accordingly formed expectations, firms can alternatively implement their patents simultaneously. This is because investment-specific technological change naturally introduces a one-period discrepancy between the time rms implement their patents and the time they receive revenue out of them. The implementation of a patent implies a sharp fall in investment which, in turn, causes a boom in current consumption. As a result, the consumption boom takes place before the wealth boom. This not only eliminates the need to smooth consumption away from the wealth boom to the period before it as conjectured, but, further, it implies that the interest rate paid when revenue is realized -and wealth expands- falls. Consequently, present discounted profits rise and implementation cycles can become a possibility. In a policy extension, I show that prolonging patent rights to two periods rules out "implementation cycles" and may lead to a welfare improvement. Key words: Implementation cycles ; capital ; savings ; monopoly ; demand externalities ; multiple equilibria ; patent rights JEL Classification: D42 ; D51 ; E21 ; E22 ; E32 ; O33 ; O34

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    File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2012/twerp_983.pdf
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    Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 983.

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    Date of creation: 2012
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    Handle: RePEc:wrk:warwec:983
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    Web page: http://www2.warwick.ac.uk/fac/soc/economics/

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    1. Carlos J. Ponce & Emeric Henry, 2011. "Waiting to Imitate: On the Dynamic Pricing of Knowledge," Sciences Po publications info:hdl:2441/eu4vqp9ompq, Sciences Po.
    2. Matsuyama, Kiminori, 1996. "Growing Through Cycles," Economics Series 40, Institute for Advanced Studies.
    3. Gale, D. & Chamley, C., 1992. "Information Revelation and Strategic Delay in a Model of Investment," Papers 10, Boston University - Department of Economics.
    4. Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
    5. Grossman, Gene M & Helpman, Elhanan, 1991. "Quality Ladders in the Theory of Growth," Review of Economic Studies, Wiley Blackwell, vol. 58(1), pages 43-61, January.
    6. Shleifer, Andrei, 1986. "Implementation Cycles," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1163-90, December.
    7. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 2000. "The role of investment-specific technological change in the business cycle," European Economic Review, Elsevier, vol. 44(1), pages 91-115, January.
    8. Boldrin, Michele & Woodford, Michael, 1990. "Equilibrium models displaying endogenous fluctuations and chaos : A survey," Journal of Monetary Economics, Elsevier, vol. 25(2), pages 189-222, March.
    9. Jovanovic, Boyan, 2009. "Investment options and the business cycle," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2247-2265, November.
    10. Thomas J. Holmes & James A. Schmitz, Jr., 2010. "Competition and productivity: a review of evidence," Staff Report 439, Federal Reserve Bank of Minneapolis.
    11. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
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