Date of This Version
April 2010
Abstract
We study a quality-ladder model of endogenous growth that produces stochastic leadership cycles. Over a cycle, industry leaders can innovate several successive times in the same industry, gradually increasing the magnitude of their technological lead before being replaced by a new entrant. Initially, new leaders are eager to enlarge their lead and do much of the research, but if they innovate repeatedly, their propensity to invest in R&D decreases. Eventually they stop doing research altogether, and as they are overtaken a new cycle starts. The model generates a skewed firm size distribution and a deviation from Gibrat’s law that accord with the empirical evidence. We also consider various policy measures, showing that in some cases policy should favour R&D by incumbents, not outsiders, and that stronger patent protection may reduce innovation and growth.
Recommended Citation
Denicolo, Vincenzo and Zanchettin, Piercarlo, "Leadership Cycles" (April 13, 2010). Fondazione Eni Enrico Mattei Working Papers. Paper 425.
https://services.bepress.com/feem/paper425