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A Trapped Factors Model of Innovation

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  • Nicholas Bloom
  • Paul Romer
  • Stephen Terry
  • John Van Reenen

Abstract

When will reducing trade barriers against a low wage country cause innovation to increase in high wage regions like the US or EU? We develop a model where factors of production have costs of adjustment and so are partially "trapped" in producing old goods. Trade liberalization with a low wage country reduces the profitability of old goods and so the opportunity cost of innovating falls. Interestingly, the "China shock" is more likely to induce innovation than liberalization with high wage countries. These implications are consistent with a range of recent empirical evidence on the impact of China and offers a new mechanism for positive welfare effects of trade liberalization over and above the standard benefits of specialization and market expansion. Calibrations of our model to the recent experience of the US with China suggests that there will be faster long-run growth through innovation in the US and that, in the short run, this is magnified by the trapped factor effect.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1189.

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Date of creation: Feb 2013
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Handle: RePEc:cep:cepdps:dp1189

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: Trade; innovation; China;

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  1. Andrew Atkeson & Ariel Burstein, 2007. "Innovation, firm dynamics, and international trade," NBER Working Papers 13326, National Bureau of Economic Research, Inc.
  2. Arnaud Costinot & Andres Rodriguez-Clare & Costas Arkolakis, 2010. "New Trade Models, Same Old Gains?," 2010 Meeting Papers, Society for Economic Dynamics 433, Society for Economic Dynamics.
  3. David H. Autor & David Dorn & Gordon H. Hanson, 2013. "The Geography of Trade and Technology Shocks in the United States," American Economic Review, American Economic Association, American Economic Association, vol. 103(3), pages 220-25, May.
  4. Costas Arkolakis & Svetlana Demidova & Peter J. Klenow & Andres Rodriguez-Clare, 2008. "Endogenous Variety and the Gains from Trade," American Economic Review, American Economic Association, American Economic Association, vol. 98(2), pages 444-50, May.
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Cited by:
  1. Jing Zhang & Andrei A. Levchenko, 2011. "The Evolution of Comparative Advantage: Measurement and Welfare Implications," 2011 Meeting Papers 302, Society for Economic Dynamics.
  2. Venturini, Francesco, 2012. "Looking into the black box of Schumpeterian growth theories: An empirical assessment of R&D races," European Economic Review, Elsevier, Elsevier, vol. 56(8), pages 1530-1545.
  3. Jose Antonio Rodriguez-Lopez, 2012. "Competition and Offshoring," Working Papers 111213, University of California-Irvine, Department of Economics.

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