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The Causal Effects of Competition on Innovation: Experimental Evidence

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

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19987.

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Date of creation: Mar 2014
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Handle: RePEc:nbr:nberwo:19987
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