Reconciling the Original Schumpeterian Model with the Observed Inverted-U Relationship between Competition and Innovation

35 Pages Posted: 17 May 2018

See all articles by Roberto Bonfatti

Roberto Bonfatti

University of Nottingham, UK; University of Padua

Luis A. Bryce Campodonico

Independent

Luigi Pisano

Northwestern University - Department of Economics

Date Written: March 21, 2018

Abstract

Empirical studies have uncovered an inverted-U relationship between product-market competition and innovation. This is inconsistent with the original Schumpeterian Model, where greater competition reduces the profitability of innovation. We show that the model can predict the inverted-U if the innovators’ talent is heterogenous, and privately observable. With competition low and profitability high, talented innovators are credit constrained, since others are eager to mimic them. As competition increases, the mimickers become less eager, and talented innovators can invest more. This generates the increasing part of the relationship. With competition high, talented innovators are unconstrained, and the relationship is decreasing.

Keywords: innovation, competition, Schumpeterian Model of Growth, asymmetric information

JEL Classification: O380, E600, G380

Suggested Citation

Bonfatti, Roberto and Campodonico, Luis A. Bryce and Pisano, Luigi, Reconciling the Original Schumpeterian Model with the Observed Inverted-U Relationship between Competition and Innovation (March 21, 2018). CESifo Working Paper Series No. 6948, Available at SSRN: https://ssrn.com/abstract=3179929 or http://dx.doi.org/10.2139/ssrn.3179929

Roberto Bonfatti (Contact Author)

University of Nottingham, UK ( email )

United Kingdom

University of Padua

via Del Santo 33
Padova, 35123
Italy

Luigi Pisano

Northwestern University - Department of Economics ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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