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Endogenous Spillovers and Incentives to Innovate

  • Hans Gersbach


    (CER-ETH - Center of Economic Research, ETH Zurich)

  • Armin Schmutzler


    (Socioeconomic Institute, University of Zurich)

We present a new approach to endogenizing technological spillovers. Firms choose continuous levels of a cost-reducing innovation before they engage in competition for each other's R&D-employees. Successful bids for the competitor's employee then result in higher levels of cost reduction. Finally, firms enter product market competition. We apply the approach to the long-standing debate on the effects of the mode of competition on innovation incentives. We show that incentives to acquire spillovers are stronger and incentives to prevent spillovers are weaker under quantity competition than under price competition. As a result, for a wide range of parameters, price competition gives stronger innovation incentives than quantity competition.

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Paper provided by Socioeconomic Institute - University of Zurich in its series SOI - Working Papers with number 9902.

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Date of creation: Jan 1999
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Publication status: Published in Economic Theory 21, 2003, pages 59-79
Handle: RePEc:soz:wpaper:9902
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