Abstract

http://ssrn.com/abstract=1682192
 
 

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Innovation by Entrants and Incumbents


Daron Acemoglu


Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Dan Vu Cao


Georgetown University - Department of Economics

September 12, 2010

MIT Department of Economics Working Paper No. 10-12

Abstract:     
We extend the basic Schumpeterian endogenous growth model by allowing incumbents to undertake innovations to improve their products, while entrants engage in more “radical” innovations to replace incumbents. Our model provides a tractable framework for the analysis of growth driven by both entry of new firms and productivity improvements by continuing firms. Unlike in the basic Schumpeterian models, subsidies to potential entrants might decrease economic growth because they discourage productivity improvements by incumbents in response to reduced entry, which may outweigh the positive effect of greater creative destruction. As the model features entry of new firms and expansion and exit of existing firms, it also generates a non-degenerate equilibrium firm size distribution. We show that when there is also costly imitation preventing any sector from falling too far below the average, the stationary firm size distribution is Pareto with an exponent approximately equal to one (the so-called “Zipf” distribution”).

Number of Pages in PDF File: 57

Keywords: Innovation, Entrants, Incumbents

JEL Classification: O30, O31, O33, L11

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Date posted: September 24, 2010  

Suggested Citation

Acemoglu, Daron and Cao, Dan Vu, Innovation by Entrants and Incumbents (September 12, 2010). MIT Department of Economics Working Paper No. 10-12. Available at SSRN: http://ssrn.com/abstract=1682192 or http://dx.doi.org/10.2139/ssrn.1682192

Contact Information

Daron Acemoglu (Contact Author)
Massachusetts Institute of Technology (MIT) - Department of Economics ( email )
50 Memorial Drive
Room E52-380b
Cambridge, MA 02142
United States
617-253-1927 (Phone)
617-253-1330 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Dan Vu Cao
Georgetown University - Department of Economics ( email )
Washington, DC 20057
United States
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