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Reconciling the Original Schumpeterian Model with the Observed Inverted-U Relationship between Competition and Innovation

Roberto Bonfatti (), Luis A. Bryce Campodonico and Luigi Pisano

No 6948, CESifo Working Paper Series from CESifo Group Munich

Abstract: Empirical studies have uncovered an inverted-U relationship between product-market competition and innovation. This is inconsistent with the original Schumpeterian Model, where greater competition reduces the profitability of innovation. We show that the model can predict the inverted-U if the innovators’ talent is heterogenous, and privately observable. With competition low and profitability high, talented innovators are credit constrained, since others are eager to mimic them. As competition increases, the mimickers become less eager, and talented innovators can invest more. This generates the increasing part of the relationship. With competition high, talented innovators are unconstrained, and the relationship is decreasing.

Keywords: innovation; competition; Schumpeterian Model of Growth; asymmetric information (search for similar items in EconPapers)
JEL-codes: O38 E60 G38 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ino and nep-mac
Date: 2018
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