Innovation, Reallocation and Growth

51 Pages Posted: 10 Oct 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: September 25, 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 5% of GDP reduces welfare by about 1.5% because it deters entry of new high-type firms. On the contrary, substantial improvements (of the order of 5% 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, L1, O31, O32, O33

Suggested Citation

Acemoglu, Daron and Akcigit, Ufuk and Bloom, Nicholas and Kerr, William R., Innovation, Reallocation and Growth (September 25, 2013). Bank of Finland Research Discussion Paper No. 22/2013. Available at SSRN: https://ssrn.com/abstract=2332146 or http://dx.doi.org/10.2139/ssrn.2332146

Daron Acemoglu

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

50 Memorial Drive
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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Ufuk Akcigit

University of Chicago - Department of Economics ( email )

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HOME PAGE: http://www.ufukakcigit.com

National Bureau of Economic Research (NBER) ( email )

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Center for Economic and Policy Research (CEPR) ( email )

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United Kingdom

Nicholas Bloom

Stanford University - Department of Economics ( email )

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Stanford, CA 94305-6072
United States
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HOME PAGE: http://economics.stanford.edu/faculty/bloom

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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William R. Kerr (Contact Author)

Harvard University - Entrepreneurial Management Unit ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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