Innovation, product cycle, and asset prices

This paper constructs a simple endogenous growth model featuring the product cycle, i.e., the transition from monopoly to perfect competition, and studies its implications for both asset market and business cycle statistics. I find that the product cycle is a powerful amplification mechanism; the mo...

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Published in:Review of economic dynamics 2015-07, Vol.18 (3), p.484-504
Main Author: Jinnai, Ryo
Format: Article
Language:English
Subjects:
Business cycles
Economic growth
Economic theory
Growth models
Imitation
Innovation
Innovations
Long-run risk
Monopolies
Perfect competition
Product cycle
Product life cycle
Products
R&D
Recursive preference
Research & development
Research and development
Studies
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description This paper constructs a simple endogenous growth model featuring the product cycle, i.e., the transition from monopoly to perfect competition, and studies its implications for both asset market and business cycle statistics. I find that the product cycle is a powerful amplification mechanism; the model incorporating the product cycle is able to generate nearly twice as large an equity premium as the model without the product cycle and, as a result, matches the equity premium data. The current paper thereby contributes to advancing a promising theory on the economic sources of long-run risks, postulating that innovation and R&D cause long-run uncertainties in economic growth. •I introduce stochastic imitation to an endogenous growth model.•The composition of product changes over the business cycle.•The model is able to match the equity premium data with a recursive utility.
doi_str_mv 10.1016/j.red.2014.10.002
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source International Bibliography of the Social Sciences (IBSS); ScienceDirect Freedom Collection
subjects Business cycles
Economic growth
Economic theory
Growth models
Imitation
Innovation
Innovations
Long-run risk
Monopolies
Perfect competition
Product cycle
Product life cycle
Products
R&D
Recursive preference
Research & development
Research and development
Studies
title Innovation, product cycle, and asset prices
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