Stagnation In a stagnation equilibrium the value of an innovation is (equal or)smallerthan the costs of an innovation, which implies that no research will be undertaken. Not surprisingly, this outcome is likely if research costsFare high. Also in the stagnatory state, the full employment condition has to be satisfied, hence the equilibrium point liesonthe i^-curve and is located where the i?-curve intersects the horizontal axis (atg = 0). li n = N,the i^-curve hits the horizontal axis in the right part of Figure 3.1. This occursdit p^ >1. When this inequality is violated the regimen = N isnot feasible and we are in the regimen < N. As the economy does not grow, the waiting timeSis not a meaningful endogenous

62 3.Structural Change and Balanced Growth variable because6will necessarily be infinite. As stated in Lemma 3c, the resource constraint has to be solved forx = n/N^the share of available products that is actually consumed. In such an equilibrium there are firms that know how to produce the goodsj€{n,N],but no production ever takes place since demand given the (constant) income level is too small. Fig. 3.8. Multiple Equilibria Multiple equilibria IfPz^PR^iid if the two curves cross the model exhibits multiple equilibria. We then have three equilibria: the stagnation point and the two points of intersection of the H- and the i^-curve. There are two potential sources of multiplicity: the first is due tofinite patent length]the second is due toa hierarchic structure of preferences.To identify the critical assumptions we compare the behavior of an economy where consumers have symmetric preferences (7 = 0) to the case when preferences are hierarchic (7 > 0). With symmetric preferences(^7 = 0^ each good faces the same demand, hence all monopolistic prices are equal to p > 1. A situation wherep = 1and 5 > 0 can-not arise in an equilibrium with positive growth since a new good isimmediately purchased in the same amounts as all other goods supplied by the monopolists. The zero profit condition and the resource constraint, respectively, read F_ hs -(j)A 2p-l and 1 = yF + 65 (1 + e"^^) P-I 2p-l'

3.7 Other Types of Equilibria 63 The slope of the zero profit condition is positive because a demand externality does not arise: higher economy-wide growth has no impact on the market demand for previous innovators. Instead demand jumps from zero to a positive level and stays there until the patent has expired.^^ Hence there is always a positive association between the entry pricepand the growth rateg. The resource constraint, however, still has an ambiguous slope. A higher growth gnot only raises the demand for labor in research but it also decreases the demand for production labor. The larger fraction of monopolistic markets implies high prices on more markets leading to lower aggregate consumption demand. High growth can be sustained due to lower equilibrium employment in production and vice versa. When patent length isinfinite,this complementarity vanishes. In that case changes in the growth rate do not affect market structure because all markets are monopolized. This point has been made by Laussel and Nyssen (1999) who

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