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Blocking the Blockers? Diversity Matters

Author

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  • Iacopo Varotto

    (BANCO DE ESPAÑA)

Abstract

I study how firms’ defensive investments affect aggregate total factor productivity in a general-equilibrium model where incumbents invest both to raise productivity and to deter entry or imitation; entry occurs either by new firms into existing markets or by leading firms in entirely new product lines. Calibrating the model to US firm size, productivity, and market share distributions, I find that cracking down on defensive investments increases TFP by 1.9 percent, about three-quarters of which reflects higher technical efficiency, driven mainly by improved firm-level productivity. This gain is substantially offset by reduced product variety; absent this loss, the TFP effect would be more than four times as large. Profit taxes targeted at high-productivity leaders – those most prone to block imitation – can stimulate frontier innovation while limiting variety losses. Firm-level US evidence supports these mechanisms.

Suggested Citation

  • Iacopo Varotto, 2026. "Blocking the Blockers? Diversity Matters," Working Papers 2601, Banco de España.
    • Handle: RePEc:bde:wpaper:2601
    DOI: https://doi.org/10.53479/42285
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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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