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: Suggested Citation
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