International Trade and Innovation Dynamics with Endogenous Markups

Laurent Cavenaile, Pau Roldan-Blanco and Tom Schmitz

No 671, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: Lower costs of international trade affect both firms’ innovation incentives and theirmarket power. We develop a dynamic general equilibrium model with endogenous innovation and endogenous markups to study the interaction between these effects. Lower trade costs stimulate innovation by large firms that are technologically close to their rivals. However, as innovators increase their productivity advantage over others, they also increase their markups. Our calibrated model suggests that a fall in trade costs which increases the trade-to-GDP ratio of the US manufacturing sector from 12% (its level in the 1970s) to 24% (its current level) increases productivity growth by 0.12 percentage points and the aggregate markup by 1.70 percentage points. Without the feedback effect of innovation on the productivity distribution, markups would actually have fallen. JEL codes: F43, F60, L13, O31, O32, O33, and O41. Keywords: International Trade, Markups, Innovation, R&D, Productivity.

Date: 2020
New Economics Papers: this item is included in nep-dge, nep-ino, nep-int and nep-tid
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Citations: View citations in EconPapers (3)

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Journal Article: International Trade and Innovation Dynamics with Endogenous Markups (2023)
Working Paper: International Trade and Innovation Dynamics with Endogenous Markups (2022)
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