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Advertising, innovation and economic growth

Laurent Cavenaile () and Pau Roldan ()
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Pau Roldan: Banco de España

No 1902, Working Papers from Banco de España, Working Papers Homepage

Abstract: 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
Date: 2019-02
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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