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Innovation by Entrants and Incumbents

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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 Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~10-10-06.

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Date of creation: 06 Jan 2010
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Handle: RePEc:geo:guwopa:gueconwpa~10-10-06

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Postal: Georgetown University Department of Economics Washington, DC 20057-1036
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Fax: 202-687-6102
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Web page: http://econ.georgetown.edu/

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Postal: Marcia Suss Administrative Officer Georgetown University Department of Economics Washington, DC 20057-1036
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Web: http://econ.georgetown.edu/

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Cited by:
  1. Aghion, Philippe & Akcigit, Ufuk & Howitt, Peter, 2014. "What Do We Learn From Schumpeterian Growth Theory?," Handbook of Economic Growth, in: Handbook of Economic Growth, edition 1, volume 2, chapter 0, pages 515-563 Elsevier.
  2. König, Michael & Lorenz, Jan & Zilibotti, Fabrizio, 2012. "Innovation vs imitation and the evolution of productivity distributions," CEPR Discussion Papers 8843, C.E.P.R. Discussion Papers.
  3. Paolo Buccirossi & Lorenzo Ciari & Tomaso Duso & Giancarlo Spagnolo & Cristiana Vitale, 2009. "Competition policy and productivity growth: An empirical assessment," CIG Working Papers SP II 2009-12, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  4. Samaniego, Roberto M., 2013. "Knowledge spillovers and intellectual property rights," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 50-63.
  5. Bruce Owen, 2011. "Antitrust and Vertical Integration in “New Economy” Industries with Application to Broadband Access," Review of Industrial Organization, Springer, vol. 38(4), pages 363-386, June.
  6. Natália Barbosa & Ana Paula Faria & Vasco Eiriz, 2013. "Industry - and firm-specific factors of innovation novelty," NIPE Working Papers 10/2013, NIPE - Universidade do Minho.
  7. Loris Rubini & Klaus Desmet & Facundo Piguillem & Aranzazu Crespo, . "Breaking down the barriers to firmgrowth in Europe The fourth EFIGE policy report," Blueprints, Bruegel, number 744, June.
  8. Kılınç, Umut, 2014. "Estimating entrants' productivity when prices are unobserved," Economic Modelling, Elsevier, vol. 38(C), pages 640-647.
  9. Raphael Bergoeing & Norman V. Loayza & Facundo Piguillem, 2011. "The Aggregate and Complementary Impact of Micro Distortions," 2011 Meeting Papers 1426, Society for Economic Dynamics.

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