Technology Lock-In with Horizontal and Vertical Innovations Through Limited R&D Spending

Abstract

In this paper we analyze an inter-temporal optimization problem of a representative firm that invests in horizontal and vertical innovations and that faces a constraint with respect to total R&D spending. We find that there may exist two different steady-states of the economy when the amount of research spending falls short of an endogenously determined threshold: one with higher productivities and less new technologies being developed, and the other with more technologies being created and lower productivities. Thus, a lock-in effect may arise that, however, can be overcome by raising R&D spending sufficiently such that the steady-state becomes unique and the firm produces the whole spectrum of available technologies.

Keywords: Multiple steady-states, lock-in, innovations, R&D constraint, optimal control

JEL Classification: C61, D92, O32