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Innovation, reallocation and growth

Daron Acemoglu, Ufuk Akcigit (), Nicholas Bloom () and William Kerr ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A key feature is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using detailed US Census micro data on firm-level output, R&D and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D, and its implied elasticities are in the ballpark of a range of micro estimates. We find industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 5% of GDP reduces welfare by about 1.5% because it deters entry of new high-type firms. On the contrary, substantial improvements (of the order of 5% improvement in welfare) are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-type incumbent firms. Subsidies to incumbents encourage the survival and expansion of these firms at the expense of potential high-type entrants. We show that optimal policy encourages the exit of low-type firms and supports R&D by high-type incumbents and entry.

JEL-codes: E0 L1 O31 O32 O33 (search for similar items in EconPapers)
Date: 2013
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http://eprints.lse.ac.uk/51556/ Open access version. (application/pdf)

Related works:
Working Paper: Innovation, Reallocation and Growth (2015) Downloads
Working Paper: Innovation, reallocation and growth (2013) Downloads
Working Paper: INNOVATION, REALLOCATION AND GROWTH (2013) Downloads
Working Paper: Innovation, Reallocation and Growth (2013) Downloads
Working Paper: Innovation, Reallocation and Growth (2013) Downloads
Working Paper: Innovation, Reallocation and Growth (2013) Downloads
Working Paper: Innovation, Reallocation and Growth (2012) Downloads
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