Innovation and Product Reallocation in the Great Recession

81 Pages Posted: 3 May 2017 Last revised: 1 Nov 2017

See all articles by David Argente

David Argente

Pennsylvania State University

Munseob Lee

University of California, San Diego (UCSD)

Sara Moreira

Northwestern University

Date Written: October 2017

Abstract

We use detailed product- and firm-level data to study the sources of innovation and the patterns of productivity growth over the period from 2007 to 2013. We document several new facts on product reallocation. First, every quarter around 8 percent of products are reallocated in the economy, and the entry and exit of products are prevalent among different types of firms. Second, most reallocation of products occurs within the boundaries of the firm. The entries and exits of firms only make a small contribution in the overall creation and destruction of products. Third, product reallocation is strongly pro-cyclical and declined by more than 25 percent during the Great Recession. This cyclical pattern is almost entirely explained by a decline in within firm reallocation. Motivated by these facts, we study the causes and consequences of reallocation within incumbent firms. As predicted by Schumpeterian growth theories, the rate of product reallocation strongly depends on the innovation efforts of the firms and has important implications for revenue growth, improvements in products' quality, and productivity dynamics. Our estimates suggest that the decline in product reallocation through these margins has contributed greatly to the slow growth experienced after the Great Recession.

Keywords: Innovation, Reallocation, Productivity, Great Recession

JEL Classification: E3, O3, O4

Suggested Citation

Argente, David and Lee, Munseob and Moreira, Sara, Innovation and Product Reallocation in the Great Recession (October 2017). Available at SSRN: https://ssrn.com/abstract=2960613 or http://dx.doi.org/10.2139/ssrn.2960613

David Argente (Contact Author)

Pennsylvania State University ( email )

606 Kern Building
State College, PA 16801
United States

Munseob Lee

University of California, San Diego (UCSD) ( email )

9500 Gilman Drive
#0519
La Jolla, CA 92093-0519
United States

Sara Moreira

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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