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Competition and Growth in Neo-Schumpeterian Models

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  • Piercarlo Zanchettin

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  • Vincenzo Denicolò

Abstract

We study the effect of product market competition on the incentives to innovate and the economy’s rate of growth in an endogenous growth model. We extend previous works in industrial organization by assuming that innovation is sequential and cumulative, and early endogenous growth models by accounting for the possibility that in each period many asymmetric firms (i.e., an endogenously determined number of successive innovators) are simultaneously active. We identify the price effect, the front loading of profits, and the productive efficiency effect associated with an increase in competitive pressure. The price effect reduces the incentives to innovate, but both the front loading of profits and the productive efficiency effect raise the incentives to innovate. We demonstrate circumstances in which the productive efficiency effect dominates the price effect. In these circumstances, the front loading of profits and the fact that the productive efficiency effect dominates the price effect compound to make the equilibrium rate of growth increase with the intensity of competition.

Suggested Citation

  • Piercarlo Zanchettin & Vincenzo Denicolò, 2004. "Competition and Growth in Neo-Schumpeterian Models," Discussion Papers in Economics 04/28, Department of Economics, University of Leicester.
  • Handle: RePEc:lec:leecon:04/28
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    File URL: http://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp04-28.pdf
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    References listed on IDEAS

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    1. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September.
    2. Cabral, Luis M. B., 1995. "Conjectural variations as a reduced form," Economics Letters, Elsevier, vol. 49(4), pages 397-402, October.
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    Cited by:

    1. Daria Onori, 2015. "Competition and Growth: Reinterpreting their Relationship," Manchester School, University of Manchester, vol. 83(4), pages 398-422, July.
    2. Winfried Koeniger & Omar Licandro, "undated". "Substitutability and Competition in the Dixit-Stiglitz Model," Working Papers 2004-06, FEDEA.
    3. Daniela Grieco, 2007. "Degree of Innovativeness and Market Structure: A Model," The IUP Journal of Managerial Economics, IUP Publications, vol. 0(2), pages 7-27, May.
    4. Claude d'Aspremont & Rodolphe Dos Santos Ferreira & Louis-André Gérard-Varet, 2010. "Strategic R&D investment, competitive toughness and growth," International Journal of Economic Theory, The International Society for Economic Theory, vol. 6(3), pages 273-295.
    5. Alberto Bucci, 2005. "An Inverted-U Relationship between Product Market Competition and Growth in an Extended Romerian Model," Rivista di Politica Economica, SIPI Spa, vol. 95(5), pages 177-206, September.

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