Entrepreneurs, Growth and Cycles

Abstract

We study how strategic considerations which pertain to the microeconomic process of innovation affect the macroeconomic process of growth and its efficiency. To a lesser extent, we also study how they may cause fluctuations to occur. We do this by the means of two models.;The first model pictures a one-good economy where long-run growth and output fluctuations are endogenous consequences of the decisions taken by entrepreneurs on the allocation of their resources between production and innovation in a Markovian sequence of one-period games. We show, first, that the log of output follows a process with random walk characteristics; second, that a recession is the consequence, not of a Kydland and Prescott (1982) negative shock on technology, but of the reallocation of factors in the face of an "increased opportunity" ex ante which the entrepreneurs fail to exploit ex post; third, and finally, that, although any generation could make itself unilaterally better off by reducing its level of research, the one-good economy is intertemporally efficient in that such a move would imply a reduction in the level of welfare of future generations.;The second model pictures an infinite-horizon multisector economy where endogenous growth in the aggregate results from the innovation races which go on in each and every sector. We study the coordination failures that may arise and uncover five externalities which have strategic implications. We show that, at least for some parametrisations of our model, there exist multiple stationary equilibria associated with different rates of growth. One noteworthy source of that multiplicity is the "real income effect", which relates the resources spent on research to the real value of nominal incomes through the lower real prices innovations eventually entail. Finally, we show that, because agents are infinitely-lived and many externalities occur, the multisector economy is intertemporally inefficient. Furthermore, we show that, depending upon the particular values taken by the parameters, the competitive process may lead to either overinvestment or underinvestment in research; i.e. the rate of growth may either be higher or lower than efficiency would warrant.

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