Working Paper: CEPR ID: DP14558
Authors: Roberto Piazza; Yu Zheng
Abstract: This paper extends the standard Schumpeterian model of creative destruction by allowing the cost of innovation for followers to increase in their technological distance from the leader. This assumption is motivated by the observation that the more technologically advanced the leader is, the harder it is for a follower to leapfrog without incurring extra cost for using leader's patented knowledge. Under this R&D cost structure, leaders have an incentive to play an "endpoint strategy": they increase their technological advantage, counting on the fact that followers will eventually stop innovating -- allowing leadership to prevail. We find that several results in the standard model fail to hold. In addition to the high-growth steady state in which only followers innovate, there now exists a second saddle-path-stable steady state: a low-growth steady state that features both leaders and followers innovating. A policy that increases monopolistic rents or extends parent duration can push the economy toward the low-growth steady state, causing, in some cases, irreversible harm to long-run growth.
Keywords: innovation; persistent monopoly; endogenous growth; growth trap
JEL Codes: O31; O34; O41; L16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increasing monopolistic rents (D42) | low-growth steady state (O41) |
| low-growth steady state (O41) | both leaders and followers innovate (O35) |
| endpoint strategy employed by leaders (F55) | followers cease to innovate (O35) |
| leaders leveraging technological advantage (O33) | discourage competition (L12) |
| discourage competition (L12) | negative feedback loop for innovation (O36) |
| transition from high-growth to low-growth steady state (O41) | significant long-term implications for economic growth (F69) |
| multiple steady states complicate policy reversibility (C62) | substantial policy adjustments required (E61) |