Hyunjae Lee

Steady aggregate growth coexists with non-stationary industry life cycles. A Schumpeterian growth model generates this coexistence as potential entrants choose between joining an existing industry and creating a new one. Individual industries follow endogenous life cycles, yet their stationary cross-section sustains steady growth and decomposes it into variety creation, frontier innovation, and follower catch-up. Calibrated to U.S. data, the model implies that growth is U-shaped in the firm-entry rate, with the economy on the downward-sloping segment. At the calibrated equilibrium, a constrained planner locally favors more industry creation over most of the stationary distribution, because entrants cannot appropriate the knowledge a new industry adds. Innovation policy operates not only through R&D incentives but also through the reallocation of entry between existing and new industries.