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Competition and Innovation: an Inverted-U Relationship

Author

Listed:
  • Philippe Aghion
  • Nick Bloom
  • Richard Blundell
  • Rachel Griffith
  • Peter Howitt

Abstract

This paper investigates the relationship between product market competition and innovation. We find strong evidence of an inverted-U relationship using panel data. We develop a model where competition discourages laggard firms from innovating but encourages neck-and-neck firms to innovate. Together with the effect of competition on the equilibrium industry structure, these generate an inverted-U. Two additional predictions of the model—that the average technological distance between leaders and followers increases with competition, and that the inverted-U is steeper when industries are more neck-and-neck—are both supported by the data.

Suggested Citation

  • Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 701-728.
  • Handle: RePEc:oup:qjecon:v:120:y:2005:i:2:p:701-728.
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    References listed on IDEAS

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    JEL classification:

    • O0 - Economic Development, Innovation, Technological Change, and Growth - - General
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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