Innovation, Reallocation and Growth

Daron Acemoglu, Ufuk Akcigit, Nicholas Bloom and William Kerr

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A key feature 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 detailed 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, and its implied elasticities are in the ballpark of a range of micro estimates. We find industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 5% of GDP reduces welfare by about 1.5% because it deters entry of new high-type firms. On the contrary, substantial improvements (of the order of 5% improvement in welfare) are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-type incumbent firms. Subsidies to incumbents encourage the survival and expansion of these firms at the expense of potential high-type entrants. We show that optimal policy encourages the exit of low-type firms and supports R&D by high-type incumbents and entry.

Keywords: industrial policy; productivity growth; innovation; R&D (search for similar items in EconPapers)
JEL-codes: E02 L1 O31 O32 O33 (search for similar items in EconPapers)
Date: 2013-05
New Economics Papers: this item is included in nep-bec, nep-com, nep-cse, nep-ino, nep-ipr, nep-pr~, nep-knm, nep-mac, nep-sbm, nep-tid and nep-ure
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Citations: View citations in EconPapers (139)

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https://cep.lse.ac.uk/pubs/download/dp1216.pdf (application/pdf)

Related works:
Journal Article: Innovation, Reallocation, and Growth (2018)
Working Paper: Innovation, Reallocation, and Growth (2017)
Working Paper: Innovation, Reallocation and Growth (2015)
Working Paper: INNOVATION, REALLOCATION AND GROWTH (2013)
Working Paper: Innovation, reallocation and growth (2013)
Working Paper: Innovation, Reallocation and Growth (2013)
Working Paper: Innovation, Reallocation and Growth (2013)
Working Paper: Innovation, reallocation and growth (2013)
Working Paper: Innovation, Reallocation and Growth (2012)
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