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The Causal Effects of Competition on Innovation: Experimental Evidence

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  • Aghion, Philippe
  • Bechtold, Stefan
  • Cassar, Lea
  • Herz, Holger

Abstract

In this paper, 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, i.e. 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

  • Aghion, Philippe & Bechtold, Stefan & Cassar, Lea & Herz, Holger, 2014. "The Causal Effects of Competition on Innovation: Experimental Evidence," Scholarly Articles 27738688, Harvard University Department of Economics.
  • Handle: RePEc:hrv:faseco:27738688
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    Cited by:

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    2. Claudia Steinwender, 2015. "The Roles of Import Competition and Export Opportunities for Technical Change," CEP Discussion Papers dp1334, Centre for Economic Performance, LSE.
    3. Gutierrez, German & Philippon, Thomas, 2016. "Investment-less Growth: An Empirical Investigation," CEPR Discussion Papers 11673, C.E.P.R. Discussion Papers.
    4. 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.
    5. Hu, Cui & Tan, Yong, 2016. "Product differentiation, export participation and productivity growth: Evidence from Chinese manufacturing firms," China Economic Review, Elsevier, pages 234-252.
    6. 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.
    7. Reinhilde Veugelers & Helena Schweiger, 2016. "Innovation policies in transition countries: one size fits all?," Economic Change and Restructuring, Springer, pages 241-267.
    8. Matias Busso & Sebastian Galiani, 2014. "The Causal Effect of Competition on Prices and Quality: Evidence from a Field Experiment," NBER Working Papers 20054, National Bureau of Economic Research, Inc.
    9. 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.
    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. 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.
    12. 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.
    13. Stagnaro, Carlo & Amenta, Carlo & Di Croce, Giulia & Lavecchia, Luciano, 2017. "La liberalizzazione del mercato elettrico - Una proposta per superare la maggior tutela
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    14. Germán Gutiérrez & Thomas Philippon, 2017. "Declining Competition and Investment in the U.S," NBER Working Papers 23583, National Bureau of Economic Research, Inc.
    15. Brown, James R. & Martinsson, Gustav & Petersen, Bruce C., 2017. "What promotes R&D? Comparative evidence from around the world," Research Policy, Elsevier, pages 447-462.
    16. Mustafa Caglayan & Alessandro Flamini & Babak Jahanshahi, 2017. "Organized Crime and Technology," DEM Working Papers Series 136, University of Pavia, Department of Economics and Management.

    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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