Working Paper: NBER ID: w9269
Authors: Philippe Aghion; Nicholas Bloom; Richard Blundell; Rachel Griffith; Peter Howitt
Abstract: This paper investigates the relationship between product market competition (PMC) and innovation. A growth model is developed in which competition may increase the incremental profit from innovating; on the other hand, competition may also reduce innovation incentives for laggards. There are four key predictions. First, the relationship between product market competition (PMC) and innovation is an inverted U-shape. Second, the equilibrium degree of technological neck-and-neckness' among firms should decrease with PMC. Third, the higher the average degree of neck-and-neckness' in an industry, the steeper the inverted-U relationship. Fourth, firms may innovate more if subject to higher debt-pressure, especially at lower levels of PMC. We confront these predictions with data on UK firms' patenting activity at the US patenting office. They are found to accord well with observed behavior.
Keywords: competition; innovation; patenting activity; economic growth
JEL Codes: O0; L1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Product Market Competition (PMC) (L13) | Innovation (O35) |
| Product Market Competition (PMC) (L13) | Technological Neck-and-Neckness (O33) |
| Technological Neck-and-Neckness (O33) | Innovation (O35) |
| Debt Pressure (F34) | Innovation (O35) |