On the Welfare Effects of Productivity Catch-Up by Laggard Firms

University of Nottingham Research Paper No. 2006/09

27 Pages Posted: 19 May 2006

Date Written: May 2006

Abstract

The substantial within-industry variation in firm productivity typically observed in the data suggests that there is ample scope for productivity catch-up by laggard firms. We analyse the normative effects of such catch-up. In the short run, where firms' process technologies are fixed, catch-up can reduce social welfare if the initial productivity gap between firms is sufficiently large (the Lahiri/Ono effect). However, in the long run, where firms invest in process R&D to maximize profits, social welfare jumps upwards following catch-up if it causes the major firm's R&D spending lead to grow. Both qualitative insights appear quite general.

Keywords: productivity catch-up, social welfare, process R&D

JEL Classification: D61, L13, O33

Suggested Citation

Ferrett, Ben, On the Welfare Effects of Productivity Catch-Up by Laggard Firms (May 2006). University of Nottingham Research Paper No. 2006/09 , Available at SSRN: https://ssrn.com/abstract=903137 or http://dx.doi.org/10.2139/ssrn.903137

Ben Ferrett (Contact Author)

Loughborough University ( email )

School of Business and Economics
Loughborough University
Loughborough, LE11 3TU
Great Britain

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