The Causal Effects of Competition on Innovation: Experimental Evidence

34 Pages Posted: 24 Mar 2014 Last revised: 30 Sep 2014

See all articles by Philippe Aghion

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Stefan Bechtold

ETH Zurich

Lea Cassar

University of Cologne

Holger Herz

University of Fribourg - Department of Economics

Date Written: March 2014

Abstract

In this paper, we design two laboratory experiments to analyze the causal effects of competition on step-by-step innovation. Innovations result from costly R&D investments and move technology up one step. Competition is inversely measured by the ex post rents for firms that operate at the same technological level, i.e. for neck-and-neck firms. First, we find that increased competition leads to a significant increase in R&D investments by neck-and-neck firms. Second, increased competition decreases R&D investments by firms that are lagging behind, in particular if the time horizon is short. Third, we find that increased competition affects industry composition by reducing the fraction of sectors where firms are neck-and-neck. All these results are consistent with the predictions of step-by-step innovation models.

Suggested Citation

Aghion, Philippe and Bechtold, Stefan and Cassar, Lea and Herz, Holger, The Causal Effects of Competition on Innovation: Experimental Evidence (March 2014). NBER Working Paper No. w19987. Available at SSRN: https://ssrn.com/abstract=2413335

Philippe Aghion (Contact Author)

College de France and London School of Economics and Political Science, Fellow ( email )

London
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stefan Bechtold

ETH Zurich ( email )

IFW E 47.2
Zurich, 8092
Switzerland
+41-44-632-2670 (Phone)

HOME PAGE: http://www.ip.ethz.ch/people/bechtold

Lea Cassar

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Holger Herz

University of Fribourg - Department of Economics ( email )

Fribourg
Switzerland

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