EconPapers    
Economics at your fingertips  
 

Competition and innovation: an inverted U relationship

Philippe Aghion (), Nicholas Bloom (), Richard Blundell (), Rachel Griffith () and Peter Howitt ()
Additional contact information
Philippe Aghion: Institute for Fiscal Studies and Harvard University

No W02/04, IFS Working Papers from Institute for Fiscal Studies

Abstract: This paper investigates the relationship between product market competition (PMC) and innovation. A Schumpeterian growth model is developed in which firms innovate ?tep-by-step? and where both technological leaders and their followers engage in R&D activities. In this model, competition may increase the incremental profit from innovating; on the other hand, competition may also reduce innovation incentives for laggards. This model generates four main predictions which we test empirically. First, the relationship between product market competition (PMC) and innovation is an inverted U-shape: the escape competition effect dominates for low initial levels of competition, whereas the Schumpeterian effect dominates at higher levels of competition. Second, the equilibrium degree of technological ?eck-and-neckness' among firms should decrease with PMC. Third, the higher the average degree of ?eck-and-neckness' in an industry, the steeper the inverted-U relationship between PMC and innovation in that industry. Fourth, firms may innovate more if subject to higher debt-pressure, especially at lower levels of PMC. We confront these four predictions with a new panel data set on UK firms' patenting activity at the US patenting office. The inverted U relationship, the neck and neck, and the debt pressure predictions are found to accord well with observed behavior in the data.

New Economics Papers: this item is included in nep-ino
Date: 2002-02-02
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (190) Track citations by RSS feed

Downloads: (external link)
http://www.ifs.org.uk/wps/wp0204.pdf (application/pdf)

Related works:
Journal Article: Competition and Innovation: an Inverted-U Relationship (2005) Downloads
Working Paper: Competition and Innovation: An Inverted-U Relationship (2005) Downloads
Working Paper: Competition and Innovation: An Inverted U Relationship (2002) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ifs:ifsewp:02/04

Ordering information: This working paper can be ordered from
The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE

Access Statistics for this paper

More papers in IFS Working Papers from Institute for Fiscal Studies The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE. Contact information at EDIRC.
Series data maintained by Emma Hyman ().

 
Page updated 2017-10-23
Handle: RePEc:ifs:ifsewp:02/04