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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 reduced entry, which may outweigh the positive effect of greater creative destruction. As the model features entry of new firms and expansion and exit of existing firms, it also generates a non-degenerate 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 so-called “Zipf distribution”).

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16411.

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Date of creation: Sep 2010
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Handle: RePEc:nbr:nberwo:16411

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Cited by:
  1. 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.
  2. König, Michael & Lorenz, Jan & Zilibotti, Fabrizio, 2012. "Innovation vs imitation and the evolution of productivity distributions," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8843, C.E.P.R. Discussion Papers.
  3. Kılınç, Umut, 2014. "Estimating entrants' productivity when prices are unobserved," Economic Modelling, Elsevier, Elsevier, vol. 38(C), pages 640-647.
  4. Samaniego, Roberto M., 2013. "Knowledge spillovers and intellectual property rights," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 31(1), pages 50-63.
  5. Raphael Bergoeing & Norman V. Loayza & Facundo Piguillem, 2011. "The Aggregate and Complementary Impact of Micro Distortions," 2011 Meeting Papers 1426, Society for Economic Dynamics.
  6. Natália Barbosa & Ana Paula Faria & Vasco Eiriz, 2013. "Industry - and firm-specific factors of innovation novelty," NIPE Working Papers, NIPE - Universidade do Minho 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, December.
  8. Aghion, Philippe & Akcigit, Ufuk & Howitt, Peter, 2014. "What Do We Learn From Schumpeterian Growth Theory?," Handbook of Economic Growth, Elsevier, in: Handbook of Economic Growth, edition 1, volume 2, chapter 0, pages 515-563 Elsevier.
  9. Bruce Owen, 2011. "Antitrust and Vertical Integration in “New Economy” Industries with Application to Broadband Access," Review of Industrial Organization, Springer, Springer, vol. 38(4), pages 363-386, June.

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