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Competition and Innovation: An Inverted-U Relationship

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

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. © 2005 MIT Press

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Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 120 (2005)
Issue (Month): 2 (May)
Pages: 701-728

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Handle: RePEc:tpr:qjecon:v:120:y:2005:i:2:p:701-728
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  1. Richard Blundell & Alan Duncan & Costas Meghir, 1998. "Estimating Labor Supply Responses Using Tax Reforms," Econometrica, Econometric Society, vol. 66(4), pages 827-862, July.
  2. Hall, Bronwyn H. & Jaffe, Adam & Trajtenberg, Manuel, 2001. "Market Value and Patent Citations: A First Look," Department of Economics, Working Paper Series qt8vh1c20f, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Chirinko, Robert S. & Fazzari, Steven M. & Meyer, Andrew P., 1999. "How responsive is business capital formation to its user cost?: An exploration with micro data," Journal of Public Economics, Elsevier, vol. 74(1), pages 53-80, October.
  4. Nicholas Bloom & John Van Reenen, 2002. "Patents, Real Options and Firm Performance," Economic Journal, Royal Economic Society, vol. 112(478), pages C97-C116, March.
  5. Richard Blundell & Rachel Griffith & John Van Reenen, 1994. "Dynamic count data models of technological innovation," IFS Working Papers W94/10, Institute for Fiscal Studies.
  6. Stephen Nickell, 1993. "Competition and Corporate Performance," CEP Discussion Papers dp0182, Centre for Economic Performance, LSE.
  7. Philippe Aghion & Nicholas Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2002. "Competition and Innovation: An Inverted U Relationship," NBER Working Papers 9269, National Bureau of Economic Research, Inc.
  8. Jerry A. Hausman & Bronwyn H. Hall & Zvi Griliches, 1984. "Econometric Models for Count Data with an Application to the Patents-R&D Relationship," NBER Technical Working Papers 0017, National Bureau of Economic Research, Inc.
  9. Aghion, Philippe & Schankerman, Mark, 1999. "Competition, Entry, and the Social Returns to Infrastructure in Transition Economies," CEPR Discussion Papers 2052, C.E.P.R. Discussion Papers.
  10. Richard Blundell & James Powell, 2001. "Endogeneity in nonparametric and semiparametric regression models," CeMMAP working papers CWP09/01, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  11. Harris, Christopher & Howitt, Peter & Vickers, John & Aghion, Philippe, 2001. "Competition, Imitation and Growth with Step-by-Step Innovation," Scholarly Articles 12375013, Harvard University Department of Economics.
  12. Hassett, Kevin A & Hubbard, R Glenn, 1998. "Are Investment Incentives Blunted by Changes in Prices of Capital Goods?," International Finance, Wiley Blackwell, vol. 1(1), pages 103-25, October.
  13. Richard Blundell & Rachel Griffith & Frank Windmeijer, 1999. "Individual effects and dynamics in count data models," IFS Working Papers W99/03, Institute for Fiscal Studies.
  14. Aghion, Philippe & Harris, Christopher & Vickers, John, 1997. "Competition and growth with step-by-step innovation: An example," European Economic Review, Elsevier, vol. 41(3-5), pages 771-782, April.
  15. Blundell, Richard & Griffith, Rachel & van Reenen, John, 1999. "Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 529-54, July.
  16. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  17. Mathias Dewatripont & Philippe Aghion & Patrick Rey, 1999. "Competition, financial discipline and growth," ULB Institutional Repository 2013/9619, ULB -- Universite Libre de Bruxelles.
  18. Philippe Aghion & Mark Schankerman, 1999. "Competition, entry and the social returns to infrastructure in transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(1), pages 79-101, March.
  19. Joaquim Oliveira Martins & Stefano Scarpetta & Dirk Pilat, 1996. "Mark-Up Ratios in Manufacturing Industries: Estimates for 14 OECD Countries," OECD Economics Department Working Papers 162, OECD Publishing.
  20. Ricardo J. Caballero & Adam B. Jaffe, 1993. "How High are the Giants' Shoulders: An Empirical Assessment of Knowledge Spillovers and Creative Destruction in a Model of Economic Growth," NBER Chapters, in: NBER Macroeconomics Annual 1993, Volume 8, pages 15-86 National Bureau of Economic Research, Inc.
  21. Philippe Aghion & Wendy Carlin & Mark Schaffer, 2002. "Competition, Innovation and Growth in Transition: Exploring the Interactions between Policies," William Davidson Institute Working Papers Series 501, William Davidson Institute at the University of Michigan.
  22. Grosfeld, Irena & Tressel, Thierry, 2001. "Competition, Corporate Governance: Substitutes or Complements? Evidence from the Warsaw Stock Exchange," CEPR Discussion Papers 2888, C.E.P.R. Discussion Papers.
  23. Nicholas Bloom & John Van Reenen, 2000. "Patents, productivity and market value: evidence from a panel of UK firms," IFS Working Papers W00/21, Institute for Fiscal Studies.
  24. Oliver D. Hart, 1983. "The Market Mechanism as an Incentive Scheme," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 366-382, Autumn.
  25. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-93, June.
  26. Aghion, Philippe, et al, 2001. "Competition, Imitation and Growth with Step-by-Step Innovation," Review of Economic Studies, Wiley Blackwell, vol. 68(3), pages 467-92, July.
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