An Analysis of the Importance of Both Destruction and Creation to Economic Growth

Gregory Huffman

No 19-00005, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: A growth model is studied in which the destruction (or exit) decision is decoupled from the creative (or research) decision. In contrast with the existing literature, the approach adopted here emphasizes that these important decisions are made by different agents, but they ultimately influence each other. As such, the destruction decision is just as important as that of creation, and in the model if destruction ceases, then so will growth. Any distortion introduced into one of these decisions will then inevitably affect the other as well. It is then possible to characterize endogenous features of the equilibrium such as the number of workers and firms, the determinants of income mobility, income inequality (Gini Coefficient), the growth rate, the lifespan of a firm, and the effect of various taxes or distortions. A planning problem is also studied, and it is shown that a multitude of factors may yield an optimum exit decision that is different from the equilibrium decision rule. This may mean that the equilibrium can give rise either too high or low a level of innovation, but also the destruction or exit rate may also be too high or low. It is then shown that a non-linear tax/subsidy scheme, which alters the research and exit decisions, may improve welfare, relative to the equilibrium level. The model also yields welfare benefits/costs that are considerably different from what one might normally expect.

Keywords: Economic Growth; Creative Destruction; Innovation; Firm Exit; Tax Policy; Inequality (search for similar items in EconPapers)
JEL-codes: E0 O3 (search for similar items in EconPapers)
Date: 2019-03-25
New Economics Papers: this item is included in nep-ent
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.accessecon.com/pubs/VUECON/VUECON-19-00005.pdf (application/pdf)

Related works:
Working Paper: An Analysis of the Importance of Both Destruction and Creation to Economic Growth (2019)
Working Paper: An Analysis of the Importance of Both Destruction and Creation to Economic Growth (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:van:wpaper:vuecon-19-00007

Access Statistics for this paper

More papers in Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by John P. Conley ().