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Innovation, Reallocation and Growth

  • Daron Acemoglu

    ()

    (Department of Economics, Massachusetts Institute of Technology)

  • Ufuk Akcigit

    ()

    (Department of Economics, University of Pennsylvania)

  • Nicholas Bloom

    ()

    (Department of Economics, Stanford University)

  • William R. Kerr

    ()

    (Entrepreneurial Management Unit, Harvard University)

We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A key feature is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using detailed US Census micro data on firm-level output, R&D and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D, and its implied elasticities are in the ballpark of a range of micro estimates. We find industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 5% of GDP reduces welfare by about 1.5% because it deters entry of new high-type firms. 0n the contrary, substantial improvements (of the order of 5% improvement in welfare) are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-type incumbent firms. Subsidies to incumbents encourage the survival and expansion of these firms at the expense of potential high-type entrants. We show that optimal policy encourages the exit of low-type firms and supports R&D by high-type incumbents and entry.

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File URL: http://economics.sas.upenn.edu/system/files/13-018.pdf
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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 13-018.

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Length: 47 pages
Date of creation: 13 Apr 2013
Date of revision:
Handle: RePEc:pen:papers:13-018
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