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.