Analysis of transition dynamics caused by technological breakthroughs: Cause of productivity slowdown and drop in existing firms’ stock prices

• We construct a model to examine the dynamics caused by technological breakthroughs.
• We analyze transition dynamics of semi-endogenous growth model.
• We focus on the movements of productivity and stock price.
• We analytically obtain results consistent with movements observed empirically.
• The explanation about these movements is different from those of related studies.

This paper examines the transition dynamics caused by technological breakthroughs. Our results show that technological breakthroughs cause a productivity slowdown and a drop in the stock prices of existing firms; these findings are consistent with observations in the 1970s. We explain how technological breakthroughs cause these phenomena. The emergence of a new technology creates new business opportunities, which reduces existing firms’ profits, thus causing their stock prices to drop. This decline in existing firms’ profits discourages R&D-intensive firms from entering the sector; this decreases aggregate R&D activity, and thus the growth rate of productivity declines.