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Innovation by Entrants and Incumbents

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  • Daron Acemoglu
  • Dan Vu Cao

Abstract

We extend the basic Schumpeterian endogenous growth model by allowing incumbents to undertake innovations to improve their products, while entrants engage in more radical innovations to replace incumbents. Our model provides a tractable framework for the analysis of growth driven by both entry of new firms and productivity improvements by continuing firms. Unlike in the basic Schumpeterian models, subsidies to potential entrants might decrease economic growth because they discourage productivity improvements by incumbents in response to increased entry, which may outweigh the positive effect of greater creative destruction. As the model features entry of new fi.rms and expansion and exit of existing firms, it also generates a nondegenerate equilibrium firm size distribution. We show that, when there is also costly imitation preventing any sector from falling too far below the average, the stationary firm size distribution is Pareto with an exponent approximately equal to one (the socalled .Zipf distribution.). Classification-JEL Codes:

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 661465000000000227.

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Date of creation: 08 Oct 2010
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Handle: RePEc:cla:levarc:661465000000000227

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Cited by:
  1. Michael Koenig & Jan Lorenz & Fabrizio Zilibotti, . "Innovation vs. Imitation and the Evolution of Productivity Distributions," Discussion Papers 11-008, Stanford Institute for Economic Policy Research.
  2. Buccirossi, Paolo & Ciari, Lorenzo & Duso, Tomaso & Spagnolo, Giancarlo & Vitale, Cristiana, 2009. "Competition Policy and Productivity Growth: An Empirical Assessment," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 283, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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