Working Paper: NBER ID: w16411
Authors: Daron Acemoglu; Dan Vu Cao
Abstract: We extend the basic Schumpeterian endogenous growth model by allowing incumbents to undertake innovations to improve their products, while entrants engage in more "radical" innovations to replace incumbents. Our model provides a tractable framework for the analysis of growth driven by both entry of new firms and productivity improvements by continuing firms. Unlike in the basic Schumpeterian models, subsidies to potential entrants might decrease economic growth because they discourage productivity improvements by incumbents in response to reduced entry, which may outweigh the positive effect of greater creative destruction. As the model features entry of new firms and expansion and exit of existing firms, it also generates a non-degenerate equilibrium firm size distribution. We show that, when there is also costly imitation preventing any sector from falling too far below the average, the stationary firm size distribution is Pareto with an exponent approximately equal to one (the so-called "Zipf distribution").
Keywords: Innovation; Entrants; Incumbents; Productivity Growth; Economic Growth
JEL Codes: L11; O31; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Entry of new firms (L26) | Decrease in R&D investments by incumbents (O39) |
| Decrease in R&D investments by incumbents (O39) | Decrease in overall productivity growth (O49) |
| Entry of new firms (L26) | Overall productivity growth (O49) |
| Presence of costly imitation (L15) | Stabilization of firm size distribution (D39) |
| Firm dynamics (D21) | Pareto distribution of firm sizes (D39) |
| Entry barriers (L11) | Enhance growth by protecting incumbent innovation (O39) |