The authors construct a rational expectations model in which the economy switches stochastically between periods of low and high growth. When agents expect growth to be slow, the returns on investment are low and little investment takes place. But if agents expect fast growth, investment is...

We explain a counterintuitive empirical finding: Firms facing more import competition do more innovation. In our model, factors are trapped inside a firm. An increase in import competition encourages a firm to innovate by reducing the opportunity cost of inputs. Without trapped factors, trade...