Innovation, growth, and welfare-improving cycles

This paper establishes necessary and sufficient conditions for the existence of stationary cycles in an economy comprising independent investing firms. The economy is not subject to aggregate uncertainty, investors have no direct complementarities, and all agents act independently. The cycle arises due to general equilibrium contemporanrous complementarities between investors devoting resources to innovation which yields temporary profits. With numerical examples we show that there art: multiple cyclical equilibria that differ in the cycle length. Welfare and the long-run growth rate can be increased from an equilibrium where innovations occur rapidly to one with longer cycles; however, there exists a finite cycle length that maximizes welfare. Journal of Economic Literature Classification Numbers: E32, L16, O31, O41. (C) 1999 Academic Press.