Blocking the Blockers? Diversity Matters

Iacopo Varotto
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Iacopo Varotto: BANCO DE ESPAÑA

No 2601, Working Papers from Banco de España

Abstract: I study how firms’ defensive investments affect aggregate total factor productivity in a general-equilibrium model where incumbents invest both to raise productivity and to deter entry or imitation; entry occurs either by new firms into existing markets or by leading firms in entirely new product lines. Calibrating the model to US firm size, productivity, and market share distributions, I find that cracking down on defensive investments increases TFP by 1.9 percent, about three-quarters of which reflects higher technical efficiency, driven mainly by improved firm-level productivity. This gain is substantially offset by reduced product variety; absent this loss, the TFP effect would be more than four times as large. Profit taxes targeted at high-productivity leaders – those most prone to block imitation – can stimulate frontier innovation while limiting variety losses. Firm-level US evidence supports these mechanisms.

Keywords: defensive investment; total factor productivity; firm dynamics; competition policy (search for similar items in EconPapers)
JEL-codes: D23 D43 E22 L11 L13 L60 O33 O43 (search for similar items in EconPapers)
Pages: 74 pages
Date: 2026-01
New Economics Papers: this item is included in nep-com and nep-sbm
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2601

DOI: 10.53479/42285

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