Advertising, innovation and economic growth
Laurent Cavenaile () and
Pau Roldan ()
Additional contact information
Pau Roldan: Banco de España
No 1902, Working Papers from Banco de España, Working Papers Homepage
This paper analyzes the implications of advertising for firm dynamics and economic growth through its interaction with R&D investment at the firm level. We develop a model of endogenous growth with firm heterogeneity that incorporates advertising decisions. We calibrate the model to match several empirical regularities across firm size using U.S. data. Through a novel interaction between R&D and advertising, our model provides microfoundations for the empirically observed negative relationship between both firm R&D intensity and growth, and firm size. Our model predicts substitutability between R&D and advertising at the firm level. Lower advertising costs are associated with lower R&D investment and slower economic growth. We provide empirical evidence supporting substitution between R&D and advertising using exogenous changes in the tax treatment of R&D expenditures across U.S. states. Finally, we find that R&D subsidies are more effective under an economy that includes advertising relative to one with no advertising.
Keywords: endogenous growth; advertising; innovation; research and development; firm dynamics; policy (search for similar items in EconPapers)
JEL-codes: E20 L10 M30 O31 O32 O33 O41 (search for similar items in EconPapers)
Pages: 69 pages
New Economics Papers: this item is included in nep-gro, nep-sbm and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1902
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