Transitional dynamics of output, wages and profits in innovation-led growth: A general equilibrium analysis

This paper focuses on the transition between steady states of innovation-led growth, in the context of a general-equilibrium model in which the exogenous appearance of a new technological paradigm triggers a wave of endogenous, stochastic, incremental innovations through which it is implemented. The analysis demonstrates existence of a unique Markov-perfect equilibrium, and shows that its transition dynamics conform in expected values to commonly observed empirical patterns. These include an initial productivity decline followed by a greater increase in productivity; and 'creative destruction' that reduces the market value of traditional, incumbent firms while creating new value in innovative entrants.