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Innovation, Reallocation and Growth

  • William Kerr

    (Harvard University)

  • Ufuk Akcigit

    (University of Pennsylvania)

  • Nicholas Bloom

    (Stanford University)

  • Daron Acemoglu

    (Massachusetts Institute of Technology)

We build a micro-founded model with endogenous firm innovation and growth. This enables us to examine the forces jointly driving innovation, productivity and reallocation. We estimate this using simulated methods of moments on detailed US Census micro data on output, R&D and patenting, obtaining a good fit to the micro-data. We also validate our model by showing a good fit between the predicted impact for R&D tax credits and skilled labor supply policies in our model to the actual data on previous episodes of these policies. Finally, we run a number of simulations on common industrial support policy. We find that a general entry subsidy increases growth rates by about 0.2%, but an R&D tax credit targeted at incumbent firms increases growth by almost 0.5%. In contrast, subsidizing fixed-costs of production helps to support failing incumbents, reducing entry by more innovative firms, and lowering growth by over 0.4%. This highlights the importance of evaluating the impact of industrial policies on both incumbents and potential entrants in a general equilibrium model.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 1137.

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Date of creation: 2012
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Handle: RePEc:red:sed012:1137
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