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Title: Innovation, Reallocation, and Growth

Author(s): Daron Acemoglu, Ufuk Akcigit, Harun Alp, Nicholas Bloom and William R. Kerr

Publication Date: November 2017

Keyword(s): Entry, growth, industrial policy, Innovation, R&D, reallocation and selection

Programme Area(s): Macroeconomics and Growth

Abstract: 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.

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Bibliographic Reference

Acemoglu, D, Akcigit, U, Alp, H, Bloom, N and Kerr, W. 2017. 'Innovation, Reallocation, and Growth'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12449