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Innovation, Industry Equilibrium, and Discount Rates

Author

Listed:
  • Bustamante, Maria Cecilia
  • D'Acunto, Francesco
  • Zucchi, Francesca

Abstract

We study how discount rates affect the level and composition of innovation within an industry. We develop a model in which higher discount rates need not reduce innovation in industry equilibrium, challenging conventional wisdom. While higher discount rates deter entry, effectively acting as entry barriers, they stimulate innovation along the intensive margin, potentially increasing aggregate industry innovation on net. The data support these predictions. The effects are stronger in more R&D intensive industries and industries with greater exposure to systematic risk. Additionally, higher discount rates foster explorative rather than exploitative innovation.

Suggested Citation

  • Bustamante, Maria Cecilia & D'Acunto, Francesco & Zucchi, Francesca, 2026. "Innovation, Industry Equilibrium, and Discount Rates," CEPR Discussion Papers 21849, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:21849
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    File URL: https://cepr.org/publications/DP21849
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    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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