Competition and Implementation Cycles

Abstract

This paper studies how innovating firms’ timing decisions on implementing new ideas affect macroeconomic fluctuations with the presence of two sources of competition: imperfect substitutability across products and imitations within products. In order to take advantage of a higher aggregate demand, firms may strategically choose to implement innovative ideas simultaneously with other firms. As a result, implementation cycles emerge endogenously in equilibrium. Using U.S. IPO and Venture-backed companies data, I first provide some empirical evidence on the existence of implementation cycles with an average frequency of 3.7 years. Second, a stylized model shows that smaller substitutability across products and longer imitation processes can contribute to a longer and lower frequent implementation cycle; it, however, has a larger impact on driving the fluctuations of macro variables. Third, when firms can only observe noisy private sunspot signals on others’ implementation decisions, the equilibrium can feature no, short, and long cycles depending on the realization of the sunspots.