Working Paper: NBER ID: w18993
Authors: Daron Acemoglu; Ufuk Akcigit; Harun Alp; Nicholas Bloom; William R. Kerr
Abstract: We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A new and central economic force is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using US Census micro data on firm-level output, R&D and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D. Taxing the continued operation of incumbents can lead to sizable gains (of the order of 1.4% improvement in welfare) by encouraging exit of less productive firms and freeing up skilled labor to be used for R&D by high-type incumbents. Subsidies to the R&D of incumbents do not achieve this objective because they encourage the survival and expansion of low-type firms.
Keywords: innovation; reallocation; economic growth; industrial policy
JEL Codes: E02; L1; O31; O32; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| taxing the continued operation of incumbents (H29) | improvement in welfare (I30) |
| taxing the continued operation of incumbents (H29) | exit of less productive firms (L19) |
| exit of less productive firms (L19) | reallocating skilled labor to R&D activities of high-type incumbents (J24) |
| R&D subsidies to incumbents (O38) | survival and expansion of low-type firms (L25) |
| survival and expansion of low-type firms (L25) | negative impact on overall productivity (F66) |
| exit of low-type firms (L19) | more productive allocation of skilled labor (J24) |