Innovation, Reallocation and Growth

Innovation, Reallocation and Growth

We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A new and central economic force 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 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. Taxing the continued operation of incumbents can lead to sizable gains (of the order of 1.4% improvement in welfare) by encouraging exit of less productive firms and freeing up skilled labor to be used for R&D by high-type incumbents. Subsidies to the R&D of incumbents do not achieve this objective because they encourage the survival and expansion of low-type firms.

Daren Acemoglu, Ufuk Akcigit, Harun Alp, Nicholas Bloom, and William R. Kerr

Harvard Business School Entrepreneurial Management Working Paper

April 8, 2013

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By |2019-06-13T08:25:19-07:00January 1st, 2018|Efficiency/Growth, Intellectual Property, Political Economy, Reference|