DP12449 Innovation, Reallocation, and Growth

Author(s): Daron Acemoglu, Ufuk Akcigit, Harun Alp, Nicholas Bloom, William R. Kerr
Publication Date: November 2017
Keyword(s): Entry, growth, industrial policy, Innovation, R&D, reallocation, selection
JEL(s): E2, L1, O31, O32, O33
Programme Areas: Macroeconomics and Growth
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12449

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.