Innovation, Reallocation and Growth
59 Pages Posted: 18 Apr 2013 Last revised: 16 Nov 2017
Date Written: November 14, 2017
We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A new and central economic force is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using US Census micro data on firm-level output, R&D and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D. Taxing the continued operation of incumbents can lead to sizable gains (of the order of 1.4% improvement in welfare) by encouraging exit of less productive firms and freeing up skilled labor to be used for R&D by high-type incumbents. Subsidies to the R&D of incumbents do not achieve this objective because they encourage the survival and expansion of low-type firms.
Keywords: entry, growth, industrial policy, innovation, R&D, reallocation, selection
JEL Classification: E2, L1, O31, O32, O33
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