In this paper we analyze an inter-temporal optimization problem of a representative rm that invests in horizontal and vertical innovations and that faces a constraint with respect to total R&D spending. We nd that there may exist two di erent steady-states of the economy when the amount of research spending falls short of an endogenously determined threshold: one with higher productivities and less new technologies being developed, and the other with more technologies being created and lower productivities. Thus, a lock-in e ect may arise that, however, can be overcome by raising R&D spending su ciently such that the steady-state becomes unique and the rm produces the whole spectrum of available technologies.
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