Innovate to lead or innovate to prevail: When do monopolistic rents induce growth?

Abstract This paper extends the standard Schumpeterian model of creative destruction by allowing cost innovation for followers to increase in their technological distance from leader. assumption is motivated observation that more technologically advanced leader is, harder it a follower leapfrog without incurring extra using leader’s patented knowledge. Under this R &D structure, leaders have an incentive play “endpoint strategy": they advantage, counting on fact will eventually stop innovating—allowing leadership prevail. We find several results fail hold. In addition high -growth steady state which only innovate, there now exists second saddle-path-stable state: low features both and innovating. A policy increases monopolistic rents or parent duration can push economy toward low-growth state, causing, some cases, irreversible harm long-run growth.