IDEAS home Printed from https://ideas.repec.org/p/not/notgep/18-03.html
   My bibliography  Save this paper

Reconciling the original Schumpeterian Model with the observed inverted-U relationship between competition and innovation

Author

Listed:
  • Roberto Bonfatti
  • Luis A. Bryce Campodonico
  • Luigi Pisano

Abstract

Empirical studies have uncovered an inverted-U relationship between product-market competition and innovation. This is inconsistent with the original Schumpeterian Model, where greater competition reduces the profitability of innovation. We show that the model can predict the inverted-U if the innovators’ talent is heterogenous, and privately observable. With competition low and profitability high, talented innovators are credit constrained, since others are eager to mimic them. As competition increases, the mimickers become less eager, and talented innovators can invest more. This generates the increasing part of the relationship. With competition high, talented innovators are unconstrained, and the relationship is decreasing.

Suggested Citation

  • Roberto Bonfatti & Luis A. Bryce Campodonico & Luigi Pisano, 2018. "Reconciling the original Schumpeterian Model with the observed inverted-U relationship between competition and innovation," Discussion Papers 2018-03, University of Nottingham, GEP.
  • Handle: RePEc:not:notgep:18/03
    as

    Download full text from publisher

    File URL: http://www.nottingham.ac.uk/gep/documents/papers/2018/2018-03.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Annamaria Conti & Marie Thursby & Frank T. Rothaermel, 2013. "Show Me the Right Stuff: Signals for High-Tech Startups," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(2), pages 341-364, June.
    2. Aamir Rafique Hashmi, 2013. "Competition and Innovation: The Inverted-U Relationship Revisited," The Review of Economics and Statistics, MIT Press, vol. 95(5), pages 1653-1668, December.
    3. Michael Polder & Erik Veldhuizen, 2012. "Innovation and Competition in the Netherlands: Testing the Inverted-U for Industries and Firms," Journal of Industry, Competition and Trade, Springer, vol. 12(1), pages 67-91, March.
    4. Philippe Aghion & Steven Durlauf (ed.), 2014. "Handbook of Economic Growth," Handbook of Economic Growth, Elsevier, edition 1, volume 2, number 2.
    5. Ferdinand Rauch, 2008. "An explanation for the inverted-U relationship between competition and innovation," Vienna Economics Papers 0813, University of Vienna, Department of Economics.
    6. Bryce Campodonico, Luis A. & Bonfatti, Roberto & Pisano, Luigi, 2016. "Tax policy and the financing of innovation," Journal of Public Economics, Elsevier, vol. 135(C), pages 32-46.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Innovation; Competition; Schumpeterian Model of Growth; Asymmetric Information;

    JEL classification:

    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:not:notgep:18/03. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Hilary Hughes). General contact details of provider: http://edirc.repec.org/data/cgnotuk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.