Dynamic Effects of Tourism Shocks on Innovation in an Open-Economy Schumpeterian Growth Model

This study explores the dynamic effects of tourism shocks in an open-economy Schumpeterian growth model with endogenous market structure. A tourism shock affects the economy via a reallocation effect and an employment effect. A positive tourism shock increases employment, which raises the level of production and the growth rate of domestic output in the short run. However, a positive tourism shock also reallocates labor from production to service for tourists, which reduces production and growth in domestic output. Which effect dominates depends on leisure preference. If leisure preference is weak, the reallocation effect dominates, and the short-run effect of positive tourism shocks is monotonically negative. If leisure preference is strong, the employment effect dominates initially, and the short-run effect of tourism shocks becomes inverted-U. We use cross-country data to provide evidence for this inverted-U relationship. Finally, permanent tourism shocks do not affect long-run economic growth in our scale-invariant model.