Innovation, Reallocation and Growth

48 Pages Posted: 4 May 2013

See all articles by Daron Acemoglu

Daron Acemoglu

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

Ufuk Akcigit

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER); Center for Economic and Policy Research (CEPR)

Nicholas Bloom

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

William Kerr

Harvard University - Entrepreneurial Management Unit

Multiple version iconThere are 7 versions of this paper

Date Written: April 1, 2013

Abstract

We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A key feature 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 detailed 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, and its implied elasticities are in the ballpark of a range of micro estimates. We find industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 53 of GDP reduces welfare by about 1.53 because it deters entry of new high-type firms. On the contrary, substantial improvements (of the order of 53 improvement in welfare) are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-type incumbent firms. Subsidies to incumbents encourage the survival and expansion of these firms at the expense of potential high-type entrants. We show that optimal policy encourages the exit of low-type firms and supports R&D by high-type incumbents and entry.

Keywords: entry, growth, industrial policy, innovation, R&D, reallocation, selection

JEL Classification: E2, Ll, 03l, 032, 033

Suggested Citation

Acemoglu, Daron and Akcigit, Ufuk and Bloom, Nicholas and Kerr, William R., Innovation, Reallocation and Growth (April 1, 2013). US Census Bureau Center for Economic Studies Paper No. CES-WP-13-23. Available at SSRN: https://ssrn.com/abstract=2259726 or http://dx.doi.org/10.2139/ssrn.2259726

Daron Acemoglu (Contact Author)

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

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Ufuk Akcigit

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Nicholas Bloom

Stanford University - Department of Economics ( email )

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William R. Kerr

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