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Growth through Experimentation

  • GABLER, Alain
  • POSCHKE, Markus

Recent empirical research has documented the importance of shocks to firmspecific productivity, but has provided only limited evidence on their sources. This paper proposes and analyzes purposeful experimentation by firms as a source of such shocks and models industry dynamics in such a setting. We thereby make three contributions. The first is conceptual and consists in providing a microfoundation to the stochastic process for firm-level productivity typically specified in the macroeconomic literature with firm heterogeneity. The second consists in quantifying the importance of experimentation for aggregate productivity growth to which experimentation, as a generalized form of R&D, contributes. In a setting that allows for growth through experimentation and through market selection among firms, 36% of aggregate embodied productivity growth can be attributed to experimentation. Finally, we show that size-dependent distortions can strongly reduce growth by reducing firm-level incentives to experiment and improve productivity.

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Paper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 11-2011.

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Length: 33 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:mtl:montec:11-2011
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