Innovation, reallocation and growth

Arbeitspapier

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 t 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 rms. 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.

Object Details

• ISBN: 978-952-6699-40-0
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Finland Research Discussion Papers ; No. 22/2013

Classification and Topics

• Classification: Wirtschaft ; Innovation and Invention: Processes and Incentives ; Management of Technological Innovation and R&D ; Technological Change: Choices and Consequences; Diffusion Processes
• Subject: entry ; growth ; industrial policy ; innovation ; R&D ; reallocation ; selection

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Acemoglu, Daron ; Akcigit, Ufuk ; Bloom, Nicholas ; Kerr, William
• Event: Veröffentlichung
• (who): Bank of Finland
• (where): Helsinki
• (when): 2013

Further information

• Handle: http://hdl.handle.net/10419/212262
• Last update: 10.03.2025, 11:43 AM CET