This paper presents a model of intentional industrial innovation that features the endogenous obsolescence of existing capital goods as a result of the introduction of new capital goods of higher quality. In contrast to existin models of endogenous obsolescence, the introduction of new capital goods in this model does not immediately result in the displacement of older capital goods. Instead, many old capital goods remain in use, albeit less intensively than the newer machines. In addition, since the rate at which new capital goods become obsolete depends on expectations of the rate at which new higher quality capital goods are expected to be introduced in the future, this creates the possibility of multiple equilibria, one with high growth rates, in which capital goods quickly become obsolete and another with low growth rates, in which capital goods are used for a long time. (C) 2001 Elsevier Science B.V. All rights reserved.
