Research Discussion Papers, Bank of Finland
No 22/2013:
Innovation, reallocation and growth
Daron Acemoglu, Ufuk Akcigit, Nicholas Bloom and William Kerr ()
Abstract: 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 fit 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 firms. 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.
Keywords: entry; growth; industrial policy; innovation; R&D; reallocation; selection; (follow links to similar papers)
JEL-Codes: E02; L11; O31; O32; O33; (follow links to similar papers)
47 pages, September 25, 2013
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