THE CYCLICAL ADVANCEMENT OF DRASTIC TECHNOLOGIES

Albert De Vaal (University of Nijmegen)
I. Hakan Yetkiner (University of Groningen)
Adriaan van Zon (University of Maastricht)

Drastic technological changes are cyclical because basic R&D is carried on only at times when entrepreneurial profits for incremental technologies of the prevailing technological paradigm falls below the profits promised by the next technological paradigm. The model is essentially an endogenous technological change framework. Varieties, input to the final good production, are composite goods. Each composite good is produced by a set of intermediaries, outgrowths of basic R&D and applied R&D. The basic intermediate, product of basic R&D, is modeled as in Romer (1990). Complementary intermediates, the outgrowths of applied R&D, do show the property of falling profits. The falling character of profits implies that basic R&D becomes more yielding than applied R&D at certain points in time. Research people switches back and forth between the applied and basic research sectors, creating cycles in the advancement of drastic technologies and economic activity.