Competition as a Discovery Procedure: Schumpeter Meets Hayek in a Model of Innovation

Pedro Bento

American Economic Journal: Macroeconomics, 2014, vol. 6, issue 3, 124-52

Abstract: I incorporate an insight of Friedrich Hayek—that competition allows a thousand flowers to bloom, and discovers the best among them—into a model of Schumpeterian innovation. Firms face uncertainty about the optimal direction of innovation, so more innovations implies a higher expected value of the "best" innovation. The model accounts for two seemingly contradictory relationships reported in recent empirical studies—a positive relationship between competition and industry-level productivity growth, and an inverted-U relationship between competition and firm-level innovation. Notwithstanding the positive relationship between competition and growth, I find antitrust policy reduces industry-level growth.

JEL-codes: B52 D83 G34 K21 L11 L12 O31 (search for similar items in EconPapers)
Date: 2014
Note: DOI: 10.1257/mac.6.3.124
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Citations: View citations in EconPapers (17)

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