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Innovation by Entrants and Incumbents

57 Pages Posted: 24 Sep 2010  

Daron Acemoglu

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

Dan Cao

Georgetown University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 12, 2010

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”).

Keywords: Innovation, Entrants, Incumbents

JEL Classification: O30, O31, O33, L11

Suggested Citation

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

Daron Acemoglu (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Dan Vu Cao

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States

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