Innovation by Heterogeneous Leaders

We develop a Schumpeterian growth model in which both leaders and followers conduct R&D activities and in which leaders have different quality leads over their followers, determined by a random draw, and thus have different profit flows. We show that leaders with larger quality leads make smaller R&D investments; this result is consistent with the actual behaviors of some previous leader firms such as Sony and Eastman-Kodak. Moreover, we show that subsidizing followers f R&D can promote leaders f aggregate R&D, because promotion of followers f R&D decreases (increases) the number of leaders with larger (smaller) quality leads and smaller (larger) R&D investments.