On the Limits to Innovation Policy

How do changes in the economic environment such as reductions in international trade costs or reductions in firms innovation costs impact aggregate productivity? More generally, how do changes in economic policies that affect market size, market structure, and the costs and benefits to firms of innovative activity impact aggregate productivity? There is a very large literature, following from the work of Zvi Griliches and many others, that uses detailed firm-level data to assess the impact of changes in economic policies and changes in other aspects of the economic environment on firms' decisions to exit, export, and engage in innovative activities. Here we propose to develop models of heterogeneous innovating firms in general equilibrium that not only are consistent with the micro data on firms' behavior, but also can be used to aggregate-up from firm-level decisions to obtain a deeper understanding of how aggregate productivity should be expected to respond to changes in the economic environment or economic policy.