The Effects of Competition on Investment - Towards a Taxonomy
University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR)
Using a general two-stage framework, this paper gives sufficient conditions for increasing competition to have negative or positive effects on R&D-investment, respectively. Both possibilities arise in plausible situations, even if one uses relatively narrow concepts of increasing competition. The paper also shows that competition is more likely to increase the investments of leaders than those of laggards. When R&D-spillovers are strong, competition is less likely to increase investments. The paper also identifies conditions under which low initial levels of competition make a positive effects of competition on investment more likely.
Keywords: competition, investment, cost reduction
JEL Classification: L13, L20, L22
Date posted: October 28, 2008
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