Emergence of New Industries and Endogenous Growth Cycles

Abstract

This paper constructs a growth model in which monopolistically competing firms choose the characteristic of their own product from an unbounded product space. While consumers wish to satisfy various needs by purchasing a diverse range of goods, production costs are lower for those goods that are more similar to existing ones because of spillover effects in the learning-bydoing process. The dynamic interaction of these centrifugal and centripetal forces on the product space leads to sporadic emergence and disappearance of industries, which is a source of cyclical fluctuations in the macroeconomic growth rate.