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The Causal Effects of Competition on Innovation: Experimental Evidence

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  • Philippe Aghion

    (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Chaire Economie des institutions, de l'innovation et de la croissance - CdF (institution) - 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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    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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