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The Causal Effects of Competition on Innovation: Experimental Evidence

Author

Listed:
  • Philippe Aghion

    (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, CDF - Collège de France - CdF - Collège de France)

  • Stefan Bechtold

    (ETH Zürich - Eidgenössische Technische Hochschule - Swiss Federal Institute of Technology in Zürich [Zürich])

  • Lea Cassar

    (University of Cologne)

  • Holger Herz

    (University of Fribourg)

Abstract

We design two laboratory experiments to analyze the causal effects of competition on step-by-step innovation. Innovations result from costly R&D investments and move technology up one step. Competition is inversely measured by the ex post rents for firms that operate at the same technological level, that is, for neck-and-neck firms. First, we find that increased competition leads to a significant increase in R&D investments by neck-and-neck firms. Second, increased competition decreases R&D investments by firms that are lagging behind, in particular if the time horizon is short. Third, we find that increased competition affects industry composition by reducing the fraction of sectors where firms are neck-and-neck. All these results are consistent with the predictions of step-by-step innovation models.

Suggested Citation

  • Philippe Aghion & Stefan Bechtold & Lea Cassar & Holger Herz, 2018. "The Causal Effects of Competition on Innovation: Experimental Evidence," Post-Print halshs-01883563, HAL.
    • Handle: RePEc:hal:journl:halshs-01883563
    DOI: 10.1093/jleo/ewy004
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01883563
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    References listed on IDEAS

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    Cited by:

    1. Ganglmair, Bernhard & Holcomb, Alex & Myung, Noah, 2016. "Cutthroats or comrades: Information sharing among competing fund managers," MPRA Paper 71506, University Library of Munich, Germany.
    2. Mustafa Caglayan & Alessandro Flamini & Babak Jahanshahi, 2017. "Organized Crime and Technology," DEM Working Papers Series 136, University of Pavia, Department of Economics and Management.
    3. Steinwender, Claudia, 2015. "The roles of import competition and export opportunities for technical change," LSE Research Online Documents on Economics 61154, London School of Economics and Political Science, LSE Library.
    4. Germán Gutiérrez & Thomas Philippon, 2017. "Investmentless Growth: An Empirical Investigation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(2 (Fall)), pages 89-190.
    5. Stefan Seifert, 2015. "Measuring Productivity When Technologies Are Heterogeneous: A Semi-Parametric Approach for Electricity Generation," Discussion Papers of DIW Berlin 1526, DIW Berlin, German Institute for Economic Research.
    6. Hu, Cui & Tan, Yong, 2016. "Product differentiation, export participation and productivity growth: Evidence from Chinese manufacturing firms," China Economic Review, Elsevier, vol. 41(C), pages 234-252.
    7. Bigerna, Simona & Bollino, Carlo Andrea & Micheli, Silvia, 2016. "Renewable energy scenarios for costs reductions in the European Union," Renewable Energy, Elsevier, vol. 96(PA), pages 80-90.
    8. Manuel Munoz-Herrera & Ernesto Reuben, 2019. "Business culture: The role of personal and impersonal business relationships on market efficiency," Working Papers 20190027, New York University Abu Dhabi, Department of Social Science, revised Jun 2019.
    9. Reinhilde Veugelers & Helena Schweiger, 2016. "Innovation policies in transition countries: one size fits all?," Economic Change and Restructuring, Springer, vol. 49(2), pages 241-267, August.
    10. Andrew Smyth, 2016. "Competition, Cost Innovation, and X-inefficiency in Experimental Markets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 48(3), pages 307-331, May.
    11. OGAWA Kazuo & Elmer STERKEN & TOKUTSU Ichiro, 2019. "Why Is Investment So Weak Despite High Profitability? A panel study of Japanese manufacturing firms," Discussion papers 19009, Research Institute of Economy, Trade and Industry (RIETI).
    12. Aliya Ussinova & Isabelle Laplace & Chantal Latgé-Roucolle, 2017. "An Analysis of the Impact of Larger Aircraft (A-380) on Flight Frequency," Post-Print hal-01599423, HAL.
    13. Germán Gutiérrez & Thomas Philippon, 2017. "Declining Competition and Investment in the U.S," NBER Working Papers 23583, National Bureau of Economic Research, Inc.
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    16. Jill R. Horwitz & Charleen Hsuan & Austin Nichols, 2017. "The Role of Hospital and Market Characteristics in Invasive Cardiac Service Diffusion," NBER Working Papers 23530, National Bureau of Economic Research, Inc.
    17. Stagnaro, Carlo & Amenta, Carlo & Di Croce, Giulia & Lavecchia, Luciano, 2017. "La liberalizzazione del mercato elettrico - Una proposta per superare la maggior tutela
      [The liberalization of Italy's retail electricity market: a policy proposal]      ," MPRA Paper 81768, University Library of Munich, Germany.
    18. Brown, James R. & Martinsson, Gustav & Petersen, Bruce C., 2017. "What promotes R&D? Comparative evidence from around the world," Research Policy, Elsevier, vol. 46(2), pages 447-462.
    19. Aliya Ussinova & Isabelle Laplace & Chantal Roucolle, 2018. "An analysis of the impact of larger aircraft (A-380) on flight frequency," Post-Print hal-01682632, HAL.
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    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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