Investment in Knowledge and Capital in Oligopoly: Balanced Growth, Poverty Traps and Indeterminacy

Abstract

In industrial economies, firms build their market position by consistently investing in R&D over time and accumulating knowledge protected by secrecy, patents and other appropriability devices. To explore the macroeconomic implications of this fact, I construct an economy where oligopolistic firms establish in-house R&D programs in order to produce a continuous flow of cost-reducing (incremental) innovations that increase factor productivity, reduce production costs, and allow firms to expand sales (and therefore the capital stock) by offering lower prices. Recent models of capital accumulation in imperfect markets show that multiple equilibria are possible even in the absence of externalities when monopolistic markups are endogenous. This model shares this property. In symmetric equilibrium, markups depend on the (endogenous) number of firms and induce a non-monotonic relationship between the rate of return to investment and the capital stock. This generates multiple equilibria. There exists a threshold steady state from where the economy converges either to a poverty trap or to a balanced growth path exhibiting properties consistent with Kaldor's stylized facts. These steady states are locally determinate. Global indeterminacy is possible because a region of overlapping trajectories originating from the threshold steady state may exist. This calls attention to the role of expectations in coordinating the transition to the balanced growth path. This is driven by imbalances between the firms' stocks of capital and knowledge and exhibits properties consistent with the evidence on conditional convergence.

JEL Classification: E10, L16, O31, O40