Implementation Cycles, Investment and Growth

We develop a model of “intrinsic” cycles, driven by the decentralized behaviour of entrepreneurs and Þrms making continuous, divisible improvements in their productivity. We show that when the introduction of productivity impovements is endogenous, implementation cycles arise even in the presence of reversible investment and consumption—smoothing. The implied cyclical equilibrium is unique within its class and shares several features in common with actual business cycles. In particular its predictions are qualitatively consistent with the joint behaviour of the investment rate and Tobin’s Q during US recessions.