Industry Life Cycles in General Equilibrium

 

We show that the arrival of a general-purpose technology—the ICT Revolution— generated life cycles in “downstream” industries. Industries that did not produce ICT products, but relied on ICT for innovation, initially experienced an increase in net entry with respect to industries whose innovation relied less on ICT. Later, however, they experienced lower and negative net entry: a shakeout. We develop a generalequilibrium model of this phenomenon, featuring technological breakthroughs, endogenous follow-up innovation choices in “downstream” industries, and oligopolistic competition between heterogeneous firms at the industry level. We calibrate the model using data from the ICT Revolution, and show that it can replicate empirical life cycles.

Downstream innovation is subject to limited appropriability (implying too little innovation) and business stealing (implying too much innovation). Quantitatively, business stealing dominates, and a tax on process innovation improves welfare.

 

Joint work with: with Laurent Cavenaile, Ruben Gaetani and Tom Schmitz